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SITY  OF  CALIFORNIA 
S  ANGELES 


THE  GIFT  OF 

MAY  TREAT  MORRISON 

IN  MEMORY  OF 
ALEXANDER  F  MORRISON 


J 


•      » 


THE     WORK 


•  i»  ••1*1 


OF      THE 


BOND  HOUSE 


BY 

LAWRENCE  CHAMBERLAIN 

WITH       KOUNTZE       BROTHERS,      BANKERS,      NeW     YoRK 
AUTHOR     or 

'THE  PRINCIPLES  OF  BOND  INVESTMENT" 


NEW    YORK 
MOODY'S  MAGAZINE  BOOK  DEPARTMENT 

1912 


«  ■  .  i  . 
•  «  '  "•  • 
I      'if*. 


Copyright,    1912,     by 
A  .     W.     F  ER  RI N 


»••     •    *    • 


4^5-/ 
PREFACE 

ABOUT  eighteen  months  ago  IMr.  Ferrin, 
the  proprietor  of  Moody's  Magazine, 
requested  me  to  write  an  article  for  his 
publication  summarizing  the  services  to  the  com- 
munity that  are  performed  by  the  American  bond 
houses.  It  was  his  intention  that  men  associated 
with  other  representative  houses  should  write 
monographs  on  each  separate  bond  house  func- 
tion. Their  articles  were  to  be  elaborations  of 
the  several  kinds  of  service  that  I  had  described 
in  brief. 

Whether  because  of  engagements  or  reticence, 
the  specialists  in  the  various  departments  of  the 
business,  after  reading  my  contribution  in  proof, 
suggested  that  the  interest  of  a  comprehensive 
and  uniform  presentation  would  best  be  served 
if  I  undertook  the  entire  series,  which  I  did. 
This  is  the  explanation  of  the  unusual  form 
this  book  has  taken. 

While  writing  the  articles  I  had  no  thought 
of  making  a  book  from  them;  but  again  I  have 
been  governed  by  suggestions  from  the  bond 
houses.  Certain  of  them  wished  the  text  in  con- 
venient form  for  distribution  in  (juantity  among 
their  clients.     If  the  articles  bound  arc  of  some 

3 

431741 


4  PREFACE 

value  for  this  purpose  they  may  be  of  interest 
to  the  public  in  general ;  therefore  this  book. 

These  circumstances  explain  why  a  number  of 
phrases,  and  perhaps  even  sentences  and  para- 
graphs, have  been  repeated  in  the  following 
chapters,  or  have  been  taken  from  my  book,  The 
Principles  of  Bond  Investment,  that  was  pub- 
lished last  year.  Indeed  the  introductory  chap- 
ter of  this  series  was  printed  in  that  work. 

I  trust  that  I  have  faithfully  presented  bond 
house  conditions  as  they  are.  If  I  have  erred 
on  the  side  of  idealism,  perhaps  these  pages  will 
lead  the  public  to  require  and  a  greater  number 
of  the  investment  houses  to  offer  the  quality  of 
service  I  have  described. 

Lawrence    Chamberlain. 
Montclair,  N.  J.,  September  1,  1912. 


CONTENTS 

CHAPTER  PAGE 

I.  The  Functions  of  the  Bond  Houses 9 

The  Importance  of  the  Bond  Business — 
Ignorance  of  the  Bond  Business — Prev- 
alence of  Bond  Buying  in  New  Eng- 
land— Bankers  vs.  Brokers — The  Functions 
of  the  Bond  Houses — The  Purchasing 
Function — The  Advisory  Function — The 
Banking  Function — The  Bond  Houses  as 
Fiscal  Agents — The  Selling  Function — The 
Protective  Function. 

II.  The  Purchasing  Function 28 

Bond  Investment  as  a  Science — Laboratory 
Methods — Special  Counsel — One  Man  Buy- 
ing— Financial  Report  Agencies — Railroads 
as  Scientific  Financiers — Buying  to  Satisfy 
Clients — The  Professional  Standard — The 
Effect  of  Interest  Rates  on  Bond  Buying — 
Stock  Bonuses. 

III.  Buying    Municipals 41 

The  Ten  Investment  Elements — The  Prin- 
cipal Function  of  the  Bond  Houses — Muni- 
cipal Buying — The  Buying  of  "Legals" — 
The  Bond  Attorney — The  Selling  Cost  and 
Price  of  Legals — Carrying  Charges — Un- 
intelligent Proposals  for  Municipals  — 
Municipal  Bond  Bureaus — General  Market 
Municipals — Municipal   Defaults. 


6  CONTENTS 

CHAPTER  PAGE 

IV.  Buying  Railroad  Bonds 56 

Common  Characteristics  of  Railroad  and 
Municipal  Bonds — Railroad  Bond  Under- 
writing— Underwriting  by  Retail  Houses — 
The  Profits  of  Underwriting — A  Penn- 
sylvania Railroad  Flotation  —  Railroad 
Blanket  Refunding  Issues  —  Equipment 
Bonds — Railroad  Bond  Investment — Pro- 
prietorship and  Management — Community 
of  Interest — Management — Physical  Char- 
acteristics— Earning  Power  and  Capitaliza- 
tion. 

V.  Buying  Corporation   Bonds 74 

What  Corporation  Bonds  Are — Classifica- 
tion of  Bonds — Corporation  Bond  Invest- 
ment Principles — Knowing  the  Business  of 
the  Corporation — Water  Companies — Gas 
Companies — Street  Railways — The  Income 
of  Public  Service  Corporations  —  Bond 
Houses  as  Specialists — The  Newness  of 
Corporation  Bonds  —  Industrial  Issues  — 
The  Competition  for  Public  Utility  Bonds 
— The  Preference  for  Public  UtiHties — The 
Profit  in  Corporation  Bonds — Costly  Dis- 
tribution— Construction  Propositions — The 
Bond  Houses  as  Reorganizers. 

VI.  The  Advisory  Function 91 

Advising  a  Woman — The  Ethics  of  Sales- 
manship— Financial  Jackals — English  Sell- 
ing Methods — Financial  Advisory   Systems 


CONTENTS 


CHAPTER  PAGE 

— Bond  Advertising — General  Publicity — 
Advertising  Investment  Principles — Special 
Circulars — Investment  by  Correspondence. 


VII.  The  Protective  and  Banking  Functions..  104 

The  Mercantile  vs.  the  Protective  Policy — 
The  Spirit  of  Trusteeship — Bond  Guaran- 
ty— The  Cost  of  the  Guaranty — The  Pro- 
tective Function  Applied  to  Marketability — 
The  Cost  to  Clients  of  Artificial  Market- 
ability— Bonds  as  Collateral — The  Banking 
Functions  of  the  Bond  Houses — The  Cost 
to  Bond  Houses  of  Artificial  Marketability 
— The  Bond  Houses  as  Banks  of  Deposit — 
The  Protective  Function  Applied  to  all 
Bond  Qualities — Protecting  Security — As- 
suming Losses — Protection  in  Reorganiza- 
tion. 

VIII.  Selling  Bonds — The  Banker's  Viewpoint.  119 

The  Development  of  Bond  Selling — The 
Trouble  with  Bond  Selling — The  Cost  of 
Selling — The  Profit  in  Specialty  Selling — 
Failures  from  Competition  and  Miscarriage 
of  Issues — Selling  Economies  :  Consolida- 
tion of  Houses — Local  Representation — 
Bank  Representation — The  Economy  of 
Selling  Collateral  Trusts — Consolidation  of 
Issues  not  Houses — The  Selling  Depart- 
ment of  an  Ideal  Bond  House — The  Sales 
Manager — Territorial  Managers — The  Road 
Men  —  College  Men  as  Salesmen  —  The 
Training  of  Green   Men. 


8  CONTENTS 

CHAPTER  PAGE 

IX.  Selling   Bonds — The  Investor's  Viewpoint  137 

The  Strength  of  the  Investment  Demand — 
Savings  Banks  as  Bond  Buyers — The 
Volume  of  Municipal  Bond  Sales— Annual 
Listings  on  the  Exchange— The  Obscure 
Issues — The  Investor  Should  Know  His 
Own  Requirements — Complex  Nature  of 
Security — Complex  Nature  of  Market- 
ability— Second  Consideration:  Form  of 
the  Investment  —  Third  Consideration : 
Proper  Type  of  Bond — Fourth  Considera- 
tion :  The  Proper  Bond — Choosing  a  Bond 
House. 


Index   150 


CHAPTER  I. 

THE  FUNCTIONS  OF  THE  BOND 
HOUSES. 

1.  The   Importance  of  the   Bond   Business. 

That  part  of  the  pubHc  which  does  not  buy- 
bonds  has  a  very  meagre  idea  of  the  importance 
and  value  to  the  community  of  the  bond  busi- 
ness. It  is  not  necessary  to  resort  to  many 
figures.  It  is  necessary  only  to  realize  that 
bonds  are  the  chief  resource  of  our  govern- 
ment in  times  of  war,  of  our  states  and  muni- 
cipalities in  furtherance  of  public  works  and 
buildings,  of  our  railroads,  of  almost  all  public 
service  corporations  and  many  industrial  cor- 
porations. In  round  numbers  $1,500,000,000 
of  American  bonds  are  marketed  every  year 
and  almost  all  of  them  pass  through  the  hands 
of  American  bond  houses.  Even  those  issues 
of  which  the  ultimate  nominal  market  is  the 
New  York  Stock  Exchange  are  first  offered 
and  sponsored  by  dealers  in  bonds.  In  vol- 
ume and  number  the  transactions  cm  the  ex- 
change are  only  a  mere  fracti(jn  of  those  in 
direct  merchandising.  Of  this  $1,500,000,000 
of  bonds  one-third  is  absorbed  by  insurance 
companies,  savings  banks,  trust  companies  and 
other  banks  (in  approximately  equal  amounts) 

9 


10    FUNCTIONS  OF  BOND  HOUSES 

and  the  remaining  two-thirds  by  corporations 
(for  reserve,  etc.)  and  by  private  investors  in 
this  country  and  abroad. 

2.  Ignorance  of  the  Bond  Business.  In  view 
of  the  vast  importance  of  the  bond  business 
in  the  economic  life  of  the  country,  it  is  some- 
what surprising  that  so  little  is  known  about 
bonds  and  the  bond  business.  No  one  who 
has  had  experience  in  selling  bonds  will  deny 
that  the  "average  man"  who  has  accumulated 
a  surplus  is  far  more  conversant  with  stocks 
and  the  basic  principles  of  stock  speculation 
than  with  bonds  and  the  principles  of  bond  in- 
vestment. The  reason,  however,  is  not  far 
to  seek.  While  human  nature  remains  what 
it  is^  the  element  of  chance,  with  its  exhilara- 
ting risk,  will  be  more  attractive  to  men  than 
the  element  of  approximate  certainty  that  is  ar- 
rived at  by  painstaking,  uninspired  care.  Since 
the  stock  market  is  more  interesting  and  prob- 
lematical than  the  bond  market  to  the  majority 
of  readers,  journalism,  in  the  course  of  its  duty 
to  purvey  to  the  majority,  perennially  fills  its 
financial  pages  with  time-honored  summaries 
of  yesterday's  exchange  doings,  to-day's  gos- 
sip and  circumspect  conjectures  as  to  the  mor- 
row. 

3.  Prevalence  of  Bond  Buying  in  New 
England.  Although,  relatively  speaking,  the 
number  of  people  at  all  conversant  with  bonds 


FUNCTIONS  OF  BOND  HOUSES     11 

is  small  through  the  country  at  large,  it  is 
sometimes  surprising  to  find  what  a  large 
proportion  of  the  well-to-do  in  the  North- 
eastern States,  which  have  been  educated  to 
bond  buying,  have  at  some  time  or  other 
bought  bonds.  Every  Eastern  bond  house  has, 
or  ought  to  have,  a  list  of  at  least  70  per  cent 
of  all  the  bond  buyers  of  consequence  in  every 
city  or  town  in  New  England.  A  comparison 
of  this  list  with  a  list  of  all  persons  estimated 
to  be  worth  $50,000  or  more,  whether  bond 
buyers  or  not,  will  prove  the  prevalence  of 
bond  buying  in  this  section. 

4.  Bankers  vs.  Brokers.  The  leading  bank- 
ing houses  were  not  always  primarily  bond 
houses.  Two  generations  ago  financial  busi- 
ness of  all  kinds  was  transacted  by  "bankers 
and  brokers."  Bond  selling  was  an  incident 
to  the  general  banking,  exchange  and  broker- 
age routine.  It  was  all  done  "over  the  coun- 
ter." There  was  comparatively  little  implied 
responsibility  on  the  part  of  the  vendor.  In 
the  age  of  Commodore  Vanderbilt,  the  elder 
Gould,  Fisk  and  Drew  the  "caveat  emptor" 
principle  of  exchange  was  accepted  and  the 
devil  took  many  beside  the  hindmost.  But 
now  the  speculative  l)usiness  in  New  York, 
so  far  as  it  is  reputable  and  consequential,  is 
done  by  "Members  of  the  New  York  Stock 
Exchange"    and    the    investment    business    is 


12    FUNCTIONS  OF  BOND  HOUSES 

done  by  "Bankers,  Dealers  in  Investment 
Bonds."  Of  course,  a  house  marketing  invest- 
ment securities  may  have  a  seat  on  one  of  the 
exchanges,  but  it  is  accepted  and  understood 
that  the  firm  specializes  in  one  or  the  other 
of  these  two  forms  of  business.  The  financial 
atmosphere,  the  financial  temper  and  the  train- 
ing necessary  to  superior  service  in  either  oc- 
cupation have  accomplished  the  severance  of 
stock  dealing  and  bond  selling. 

5.  The  Functions  of  the  Bond  Houses.  Of 
course  the  primary  function  of  the  bond  house 
is  to  obtain  capital  for  the  creation  of  new  en- 
terprises or  the  enlargement  of  old.  So  far  as 
concerns  these  houses  in  their  proper  capacity 
the  capital  obtained  is  in  the  form  of  loans. 
The  houses  purchase  the  loans  outright  for 
their  own  account  and  resell  to  their  clients. 
As  in  any  sort  of  merchandising,  there  are  few 
wholesalers  and  many  retailers.  The  promi- 
nent "wholesale"  bond  dealers,  numbering  less 
than  a  dozen,  hitherto  have  confined  themselves 
for  the  most  part  (as  far  as  American  cor- 
poration loans  are  concerned)  to  the  great  rail- 
road systems.  There  are  signs  that  the  policy 
will  be  broadened  in  the  near  future.  These 
houses  have  few,  if  any,  traveling  representa- 
tives. Their  sales,  in  this  country,  are  effected 
by  public  subscription,  stimulated  through  ex- 
tensive advertising,  and  by  distribution  to  large 


FUNCTIONS  OF  BOND  HOUSES     13 

investment  institutions,  such  as  the  insurance 
companies,  and  to  the  smaller  bond  houses. 

6.  We  are  not  justified  in  omitting  to  state 
that  the  wholesale  international  bankers  have 
not  been  trained  by  the  necessities  of  the  per- 
sonal relation  between  client  and  financial  ad- 
visor to  accept  and  offer  only  such  securities 
as  they  would  be  willing  to  keep  for  their  own 
account.  It  is  not  necessary  to  illustrate,  but 
none  of  the  typical  American  "retail"  bond 
houses  could  have  the  hold  many  of  them  do 
have  upon  their  customers  if  they  had  recom- 
mended and  sold  a  tithe  of  the  bonds  and  stocks 
that  have  been  distributed  by  some  of  the  in- 
ternational bankers.  Mere  magnitude  in  the 
capitalization  of  a  bond  house  or  of  an  obligor 
corporation  is  still  a  thing  to  conjure  with  in 
America.  Financial  history  does  not  support  the 
view  that  there  is  safety  in  size,  except  with 
respect  to  municipal  corporations.  Since  the 
international  houses,  with  special  spheres  of 
usefulness,  do  not  best  represent  the  things 
for  which  the  bond  houses  stand,  and  since 
the  contact  of  private  investors  is  with  repre- 
sentatives of  the  retail  houses,  this  work  is 
concerned  only  with  the  latter. 

7.  "Retail"  is  not  a  term  properly  descriptive 
of  the  firms  we  have  in  mind,  although  it  sug- 
gests the  relative  size  of  the  issues  handled 
and  the  relative  volume  of  business.     It  mis- 


14    FUNCTIONS  OF  BOND  HOUSES 

leads  if  it  suggests  that  the  main  business  of 
such  houses  is  to  distribute  among  small  in- 
vestors issues  that  originally  were  investigated 
and  purchased  by  "wholesale"  houses.  This 
is  not  the  case.  For  the  most  part  each  of 
the  American  bond  houses  buys  its  issues  in- 
dependently, in  accordance  with  its  policy  re- 
garding investments,  or  it  buys  them  "in  joint 
account"  with  other  houses  having  similar 
policies.  These  houses  are  autonomous ;  their 
prosperity  is  built  on  their  ability  to  find  and 
obtain,  on  the  one  hand,  funded  obligations 
that  merit  investment,  and  on  the  other,  a 
clientele  that  has  faith  in  them  and  their  busi- 
ness judgment  and  probity. 

8.  The  success  of  the  bond  houses  in  weath- 
ering all  sorts  of  financial  storms  while  stock 
exchange  houses  have  gone  down  by  the  score, 
is  strong  support  of  the  contention  that  bond 
investment  rests  on  a  basis  of  principles  re- 
ducible to  a  science.  The  writer  knows  of  not 
one  important  investment  house  that  has  failed 
except  through  deliberate  violation  of  perfectly 
well-known  investment  principles  or  through 
equally  deliberate  fraud.  There  is  no  business 
in  all  the  country  that  has  placed  itself  on 
more  enduring  foundations  of  business  wis- 
dom, or  that  is  conducted  on  a  higher  plane  of 
business  ethics. 

9.  Enough  has  been  said  to  imply  the  great 


FUNCTIONS  OF  BOND  HOUSES     15 

services  of  the  American  bond  houses.  With- 
out their  help  it  would  be  impossible  to  finance 
American  enterprises  upon  equally  favorable 
terms.  By  their  ultra-conservatism  they  are 
establishing  themselves  in  public  confidence  in 
a  w^ay  to  bring  together  with  the  greatest  ex- 
pedition and  least  middleman's  cost  the  pro- 
moters of  our  national  resources  and  the  credi- 
tor classes  from  which  must  come  the  capital 
necessary  to  municipal  and  industrial  develop- 
ment. They  extend  the  boundaries  of  credit 
and  exercise  a  directive  and  steadying  influence 
upon  enterprise.  By  preaching  the  principles 
of  bond  buying  in  advertisements,  pamphlets, 
correspondence,  and  in  personal  interviews  by 
bond  salesmen  they  are  slowly  but  surely  con- 
verting the  American  people  into  a  nation  of 
investors.  When  the  rest  of  the  country  can 
acquire,  to  a  degree,  the  thrift  of  New  Eng- 
landers  we  shall  be  referred  to  the  Dutch  and 
French  less  frequently,  and  our  industrial 
structure  will  be  no  longer  in  unstable  equili- 
brium. It  will  be  worth  while  to  examine  in 
greater  detail  the  several  functions  these 
houses  perform. 

10.  The  Purchasing  Function.  If  a  muni- 
cipal loan  is  to  be  offered,  the  purchase  is  a 
comparatively  simple  matter,  provided  the 
municipality  is  well  known  to  the  fraternity. 
Then  no  preliminary  investigation  is  required ; 


16    FUNCTIONS  OF  BOND  HOUSES 

a  bid  is  made  for  the  loan  at  the  current  mar- 
ket rates  and  acceptance  on  award  is  subject 
to  the  approval  of  the  bidder's  attorney  in  all 
respects  affecting  the  validity  of  the  obligation. 

11.  If  the  municipality  is  not  well  known  to 
the  bidder  a  qualified  representative  will  be, 
or  should  be,  sent  to  learn  at  first  hand  the 
physical  and  financial  condition  of  the  city  and 
to  form  an  estimate  of  its  probable  future 
willingness  and  ability  to  meet  its  present  and 
future  obligations. 

12.  If  a  corporation  loan  is  offered  probably 
it  will  be  submitted  at  the  offices  of  the  bankers 
by  a  representative  of  the  company  or  by  a 
promoter.  If  the  applicant  is  of  a  social  turn  of 
mind  he  is  not  likely  to  lack  the  company  of 
his  kind  in  the  ante-room.  Competition,  for- 
tunately, is  fairly  active. 

13.  The  first  step  in  the  process  of  elimi- 
nation (there  is  more  elimination  than  accept- 
ance) is  to  discard  the  propositions  of  com- 
panies that  conduct  a  kind  of  business  unfamil- 
iar to  the  bankers.  Except  under  unusually 
favorable  circumstances  the  highest  grade  of 
bond  houses  will  not  purchase  bonds  of  in- 
dustrial corporations,  mining  or  irrigation  com- 
panies, etc. 

14.  The  next  step  is  to  discard  loans  that 
have  not  a  claim  on  property  worth,  under  the 
most  unfavorable   conditions,   more  than   the 


FUNCTIONS  OF  BOND  HOUSES     17 

amount  of  the  obligation  secured.  Most  cor- 
porations will  bond  themselves  in  as  large  a 
sum  as  their  bankers  will  permit.  Loans  are 
continually  being  rejected  because  of  insuffi- 
cient equity  in  property  values. 

15.  The  third  step  is  to  discard  those  propo- 
sitions which  do  not  give  reasonable  assurance 
of  earning  at  all  times  at  least  50  per  cent  more 
than  all  fixed  charges,  after  making  extremely 
liberal  estimates  for  depreciation  and  future 
increased  operating  expenses. 

16.  The  fourth  step  is  to  decline  loans  to 
companies  conducted  by  men  or  with  methods 
that  do  not  meet  with  approval. 

If  the  banking  house  is  satisfied  by  inter- 
view and  correspondence  in  matters  of  the 
above  nature,  and  if  a  suitable  price  can  be 
agreed  upon,  then  engineers  and  accountants 
may  be  sent  to  the  plant  and  offices  to  make 
a  thorough  examination ;  and  the  members  of 
the  firm,  with  counsel,  meet  officers  of  the  com- 
pany and  their  attorneys  to  settle  the  matters 
of  form.  On  acceptance  of  an  issue  a  careful 
banking  house  may  demand  representation  on 
the  directorate  of  the  company  until  such  time 
as  the  company  shall  have  discharged  its 
bonded  obligation. 

17.  Illustrative  of  the  care  with  which  prop- 
erties are  examined,  the  writer  recently  had 
occasion  to  inspect  an  interurban  line  in  Penn- 


18    FUNCTIONS  OF  BOND  HOUSES 

sylvania  and  incident  to  mileage  cost  of  con- 
struction inquired  in  jest  the  number  of  ties 
between  the  terminal  and  a  certain  city  some 
miles  distant.  "We  don't  know,"  replied  one 
of  the  owners  of  the  road,  "ask  your  engineer, 

Mr.  .     He  has  photographs  of  every 

foot  of  the  line  and  can  count  the  ties  for  you, 
but  probably  he  has  already  counted  them." 

18.  Of  course  there  is  a  difference  in  the  de- 
gree of  care  exercised  by  various  houses.  The 
ultra-conservative  will  not  permit  their  names 
to  be  associated  with  "construction  proposi- 
tions." They  will  consider  for  purchase  the 
obligations  only  of  seasoned  companies  with 
established  earning  power. 

19.  The  reactionary  effect  of  the  stringent 
requirements  of  bond  houses  is  of  inestimable 
benefit  to  corporation  finance,  but  its  good  in- 
fluence has  a  wider  sphere :  it  embraces 
municipal  corporations  and  municipal  finance. 
American  bond  houses  have  put  municipal 
bond  buying  on  an  entirely  different  plane  from 
what  it  was  in  1875.  In  this  they  have  been 
helped  by,  and  have  helped,  the  development 
of  municipal  bond  law.  In  these  days  cities  and 
towns  that  have  had  much  experience  placing 
bonds  will  be  certain  in  advance  of  their  ad- 
vertisements for  bids  that  the  loan  has  been 
issued  in  conformity  with  the  exacting  re- 
quirements  of  the  bond   attorneys.     Certain 


FUNCTIONS  OF  BOND  HOUSES     19 

strong  Canadian  houses  command  such  respect 
in  their  country  that  they  have  been  able  to 
direct  the  legislation  of  the  Western  provinces 
to  the  end  that  the  Western  loans  may  be 
more  acceptable  to  the  investors  in  the  Eastern 
provinces  and  in  England. 

20.  The  Advisory  Function.  This  advisory 
and  directive  function,  however,  is  more  promi- 
nently operative  in  bond  selling  than  in  bond 
buying.  It  has  its  source  in  the  statistical  de- 
partments which  every  house  of  quality  must 
maintain.  It  finds  its  chief  expression,  as  al- 
ready stated,  in  tabloid  investment  lessons, 
printed  in  the  advertising  columns  of  newspa- 
pers and  periodicals,  or  with  somewhat  greater 
fullness  in  pamphlets  and  monographs.  If  a 
prospective  client  has  an  investment  policy 
that  apparently  is  not  suited  to  his  particular 
needs,  the  home  ofhce  may  tactfully  direct  his 
attention  by  letter  or  through  their  representa- 
tive in  his  territory  to  a  means  by  which  he 
may  better  his  position.  Some  bond  houses 
maintain  a  daily  news  sheet  for  the  benefit  of 
their  salesmen  in  which  are  printed  not  only 
pertinent  items  of  current  interest,  but  timely 
discussions  of  diflferent  problems. 

21.  Activities  of  this  nature,  developed  to 
their  logical  conclusion,  can  lead  to  only  one 
result,  the  establishment  of  the  American  bond 
houses  in  the  confidence  of  the  public  as  their 


20    FUNCTIONS  OF  BOND  HOUSES 

chief  advisers  in  financial  matters,  in  some 
such  relation  as  the  great  banks  of  France  and 
Germany  bear  to  investors  in  those  countries. 
Even  now  a  few  of  the  better  houses  can  count 
upon  the  absorption  by  their  friends  among 
institutions  and  investors  of  a  certain  amount 
of  any  issue  they  recommend  and  offer. 

22.  This  advisory  function  can  become  gen- 
eral and  economically  sound  only  as  the  bond 
houses  as  a  class  recognize  the  scientific  and 
professional  nature  of  their  calling  and  guide 
their  movements  and  policies,  as  do  the  gov- 
ernors of  the  Bank  of  England,  let  us  say, 
alive  to  the  power  of  their  position  and  their 
responsibility  as  repositories  of  a  nation's  con- 
fidence. 

23.  The  Banking  Function.  Illustrative  of 
the  confidential  relation  between  house  and 
client,  there  has  arisen  the  demand  that  bank- 
ing departments  be  established  for  the  safe 
keeping  of  funds  destined,  upon  enlargement, 
to  go  into  investment,  and  also  to  accommo- 
date those  who  wish  to  purchase  securities  be- 
fore they  have  sufficient  funds  to  pay  in  full  for 
them.  From  the  necessities  of  these  two  situ- 
ations it  is  only  a  short  step  to  the  conduct  on 
a  small  scale  of  a  bank  of  deposit  subject  to 
check.  But  properly  and  ordinarily,  the  banking 
department  of  a  bond  house  is  conducted  as  a 
matter  of  accommodation  to  its  customers,  and 


FUNCTIONS  OF  BOND  HOUSES     21 

not  primarily  to  do  a  general  banking  business. 
From  these  beginnings  it  sometimes  has  hap- 
pened that  a  full-fledged  bank  has  been  evolved, 
in  which  the  savings,  deposit  and  trust 
functions  of  the  bank  have  balanced,  nomin- 
ally at  least,  the  sales  function  of  the  bond 
house,  but  an  exception  of  this  sort  would  only 
prove  the  rule.  Although  bond  houses  are 
banks,  technically,  and  are  entitled  to  their 
common  designation,  "bankers,"  nevertheless, 
on  the  principle  that  security  selling  is  not  best 
undertaken  by  obligor  companies  but  is  prop- 
erly left  to  the  bond  houses  which  make  it  a 
profession,  so  the  general  banking  business  is 
best  left  to  banks  proper. 

24.  The  Bond  Houses  as  Fiscal  Agents.  Be- 
cause of  their  purchasing,  advisory  and  bank- 
ing functions  the  bond  houses  are  called  upon 
to  act  as  fiscal  agents  for  corporations,  muni- 
cipalities and  even  states.  The  long  standing, 
friendly  banking  relations  of  the  older  firms 
with  the  Western  cities  recall  the  fact  that  in- 
terest, and  sometimes  the  principal,  of  the  loans 
of  these  cities  is  payable  at  the  offices  of  the 
bond  house.  Here  and  there  an  Eastern  in- 
stitution is  met  that  will  not  buy  Western 
municipals  which  are  not  payable  in  the  East. 
This  is  not  so  much  to  save  the  cost  of  con- 
version into  New  York  funds,  for  that  might 
be   arranged   in    the   price,   as   because   of   the 


22     FUNCTIONS  OF  BOND  HOUSES 

inconvenience  and  possible  loss  of  interest  in 
shipping  the  bonds  west  for  collection.  Some 
of  the  older  bond  houses  act  as  depositaries  for 
Western  cities.  In  general,  the  conduct  of  the 
bond  houses  as  fiscal  agents  has  merited  the 
trust  placed  in  them. 

25.  It  is  more  to  be  expected  that  private 
corporations  will  look  to  the  bond  houses  as 
their  financial  agents.  The  disposition  of  a 
company's  funded  loans  is  not  merely  a  matter 
of  merchandising;  it  is  natural  that  the  rela- 
tionship begun,  by  the  purchase  of  bonds  and 
banking  representation  on  the  directorate  shall 
be  continued  indefinitely  in  the  thought  of 
future  financial  needs.  Just  as  the  great  rail- 
road systems  have  their  long  established  finan- 
cial connections  with  certain  large  houses,  so 
the  public  service  and  other  private  cor- 
porations form  alliances  with  the  bond 
houses.  The  continuance  of  such  relations 
implies  conformity  on  the  part  of  the  obligor 
corporations  with  the  policy  of  the  bond 
houses.  This  also  tends  toward  a  betterment 
of  financial  conditions  throughout  the  country. 

26.  The  Selling  Function.  American  bank- 
ing houses  are  not  eleemosynary.  Whatever 
may  be  their  usefulness  in  the  community,  it 
is  the  result  of  that  enlightened  self-interest 
which  used  to  be  expressed  in  the  phrase 
"Honesty  is  the  best  policy."     Their  reason 


FUNCTIONS  OF  BOND  HOUSES    23 

for  being  is  to  make  money  by  selling  bonds, 
and  the  competition  is  getting  keener  every 
day.  Many  of  the  ordinary  effects  of  compe- 
tition are  noticeable  in  the  bond  business. 
There  is  standardization  of  wares  and  policies, 
there  is  diminution  in  ratio  of  profits.  But 
two  ordinary  effects  of  competition  are  con- 
spicuously absent.  There  is  no  deterioration 
of  the  product  and  no  tendency  toward  con- 
solidation among  the  vendors. 

27.  The  relation  of  supply  and  demand  for 
securities  is  totally  different  with  us  from  what 
it  is  in  England  or  France.  Our  industrial 
development  more  than  keeps  pace  with  our 
investment  resources.  We  are  less  dependent 
on  foreign  capital  than  ever  before,  but  not 
so  rich  that  funds  awaiting  conservative  em- 
ployment have  not  a  choice  of  excellent  oppor- 
tunities at  home. 

28.  By  reason  of  this  very  competitive  bid- 
ding by  capital  the  quality  of  our  loan  product 
offered  by  good  bond  houses  is  not  cheapened. 
In  the  process  of  soliciting  business  by  adver- 
tisement and  interview,  American  investors 
are  becoming  educated  in  investment  prin- 
ciples and  reward  with  most  patronage  the 
houses  that  give  the  best  evidence  of  living 
up  to  investment  ideals.  It  is  the  same  in  this 
as  in  the  legal  and  medical  professions.  It 
pays  best  in  the  long  run  to  be  technically 
competent. 


24    FUNCTIONS  OF  BOND  HOUSES 

29.  Since  the  principal  point  of  contact  be- 
tween investors  and  banking  houses  is  through 
travelling  representatives  whose  advice  is  fol- 
lowed to  a  very  material  extent  by  the  invest- 
ors, the  salesmen  sent  out  are  of  more  than 
average  intelligence  and  business  ability.  The 
large  majority  of  those  representing  the  better 
concerns  are  college  bred  men.  The  alert 
sales  manager  will  keep  in  touch  with  the  col- 
leges and  universities  and  will  seek  to  obtain 
for  his  firm  men  of  the  graduate  schools  or  of 
the  graduating  class  who  give  promise  of 
ability  in  salesmanship  not  only  by  their  record 
in  college  activities  but  by  their  appearance 
and  address.  Most  of  these  men  will  serve 
office  apprenticeships  of  length  before  they  are 
sent  out  on  the  road. 

30.  The  other  usual  effect  of  competition 
that  we  mentioned  as  lacking  is  the  tendency 
toward  consolidation.  The  absence  of  it  is 
further  evidence  of  the  peculiarly  professional 
relation  which  subsists  between  the  banking- 
house  in  its  advisory  capacity  and  the  client. 
It  raises  bond  selling  from  a  business  to  a 
profession. 

31.  There  are  some  who  profess  to  see  in 
the  gradual  evolution  of  the  bond  business  a 
tendency  to  relinquish  direct  selling  from 
house  to  client  through  travelling  salesmen  in 
favor  of  distribution,  on  a  commission  basis, 


FUNCTIONS  OF  BOND  HOUSES     25 

through  local  independent  bankers.  This  may 
come.  If  it  should,  it  would  be  one  of  the 
evil  effects  of  competition.  It  would  relieve 
the  "retail"  houses  of  a  large  part  of  that  sense 
of  personal  responsibility  which  they  now  feel. 
They  would  be  in  a  position  analogous  to  that 
of  the  wholesale  houses  at  present.  Investors 
would  have  to  accept  offerings  from  those 
who  had  no  part  in  the  investigation  which 
preceded  the  original  purchase  of  the  issue, 
and  who,  presumably,  would  not  have  the 
capital  or  organization  of  distribution  to  "pro- 
tect the  market"  for  the  benefit  of  those  who 
might  wish  subsequently  to  sell  their  securi- 
ties. 

32.  The  Protective  Function.  There  is  a 
radical  difference  in  the  attitude  of  different 
bond  houses  in  this  matter  of  repurchasing 
securities  of  clients  to  whom  they  have  sold 
them.  Some  take  the  stand  that  a  sale  is  a 
sale,  and  the  responsibility  of  a  house  that  has 
acted  in  good  faith  ceases  upon  delivery  of 
the  bond  and  the  receipt  of  payment.  This 
position  is  logical  and  just,  but  again  compe- 
tition steps  in  to  benefit  the  customer.  Other 
houses  say:  "We  shall  put  out  our  issues  as 
nearly  as  possible  on  a  plane  of  marketability 
with  active  listed  securities.  We  make  no 
promises,  but,  except  in  times  of  panic  when 
it  may  be  impossible  to  raise  money  to  satisfy 


26     FUNCTIONS  OF  BOND  HOUSES 

everybody,  we  hope  and  expect  to  be  so  situ- 
ated as  to  buy  back  at  the  fair  market  price 
the  securities  we  have  sold."  The  substance 
of  this  statement  is  now  occasionally  seen  in 
advertisements  over  the  signature  of  some  of 
the  better  and  stronger  houses.  Few  investors 
realize  the  full  significance  of  this  protective 
market  policy.  They  are  inclined  to  remem- 
ber that  they  may  buy  most  of  the  active  listed 
bonds  on  the  exchange  and  sell  them  the  same 
day  at  an  average  total  loss,  due  to  the  "higg- 
ling of  the  market,"  of  perhaps  only  2  points 
or  so.  They  do  not  realize  that  on  a  declining 
bond  market  they  may  have  to  take  an  addi- 
tional loss,  in  listed  bonds,  of  say  8  points,  or 
10  points  in  all,  whereas  in  the  same  circum- 
stance a  bond  house  would  think  twice  before 
quoting  a  client  a  price  10  points  below  the 
previous  selling  price.  And,  to  say  nothing 
of  investment  guidance,  nine  times  out  of  ten 
the  issue  of  the  bond  house  is  yielding  at  least 
J^%  more  per  annum  than  an  equally  sound 
listed  issue. 

33.  But  the  protective  function  of  the  bond 
house  is  most  important  in  respect  to  the 
moral  responsibility  of  "seeing  clients  through" 
default,  reorganization  and  rehabilitation  in 
the  extremely  rare  cases  in  which  trouble 
arises.  In  some  instances  losses  amounting 
to  hundreds  of  thousands  of  dollars  have  been 


FUNCTIONS  OF  BOND  HOUSES    27 

made  good;  in  many  instances  the  firms  have 
volunteered  to  pay  interest  which  has  been 
suspended ;  in  every  case  a  reputable  bond 
house  will  feel  called  upon  to  take  active 
leadership  in  upholding  the  mortgage  rights 
or  other  legal  claims  of  the  bondholders. 

34.  The  creditor  class  will  do  well  to  take 
as  much  pains  in  the  investment  of  its  wealth 
as  in  the  acquisition  of  it.  Buyers  of  corpo- 
ration bonds  should  exercise  almost  as  much 
care  in  the  selection  of  a  financial  adviser  as 
in  the  choice  of  a  security.  They  should  seek 
a  bond  house  with  a  strong  personality,  strong 
convictions  on  investment  matters  and  the 
capital  and  equipment  to  back  them  up. 

The  chapters  following  will  discuss,  in  de- 
tail, the  several  functions  that  have  been 
touched  only  briefly  here  in  order  to  present, 
at  first,  the  bird's-eye  view. 


CHAPTER  11. 
THE  PURCHASING  FUNCTION. 

35.  Bond  Investment  as  a  Science.     It  is 

only  as  one  studies  the  purchasing  function  of 
the  bond  houses,  and  the  achievements  and 
possibilities  of  economic  service  through  the 
process  of  selection  in  purchases,  that  one  real- 
izes how  rapidly  bond  investment  is  growing 
into  a  well-defined  and  thoroughly  developed 
science.  Then  why  not  treat  the  principles  of 
bond  investment  in  scholarly  fashion  and 
credit  the  orderly  study  of  them  as  the  Science 
of  Bond  Investment?  We  hear  much  these 
days  of  scientific  management  in  manufacture 
and  transportation.  It  is  a  wonderful  and 
profitable  thing;  witness  the  Standard  Oil 
Company  and  the  Atchison,  Topeka  and  Santa 
Fe.  The  greater  pity  that  below  Fulton  Street 
a  man  who  speaks  of  science  and  finance  in 
the  same  breath  carries  the  reproach  of  being 
theoretical. 

36.  However,  the  attitude  of  Wall  Street  is 
changing  toward  those  whose  profession  it  is 
to  know  securities.  One  of  the  greatest 
houses  on  the  street  may  still  have  no  statis- 
tical department,  except  that  which  is  carried 
home  nights  under  one  or  two  well-rounded 

28 


THE    PURCHASING    FUNCTION     29 

hats;  but,  on  the  other  hand,  a  firm  of  national 
reputation  and  esteem  has  recently  admitted 
into  partnership  a  man  whose  claim  to  the 
distinction  is  his  profound  railroad  scholar- 
ship. The  traditions  and  methods  of  the  dry- 
goods  and  clothing  merchants  who  founded 
our  financial  institutions  in  New  York,  are 
giving  way  as  the  younger  college-bred  gener- 
ation, trained  in,  or  at  least  in  sympathy  with 
scientific  methods,  advances  to  influential  ad- 
ministrative positions. 

37.  Laboratory  Methods.  Scientific  method 
in  bond  buying  presupposes  well-equipped 
laboratories  and  trained  analysts.  I  have  the 
good  fortune  to  be  familiar  with  the  organiza- 
tion and  work  of  one  of  the  best  financial 
laboratories  in  New  York.  The  nucleus  from 
v/hich  it  has  developed  is  the  statistical  depart- 
ment. This  is  in  charge  of  a  man  who  fattens 
on  income  accounts  and  balance  sheets.  He 
is  prepared,  if  necessary,  with  a  defensible  ex 
cathedra  report  and  opinion  on  almost  any 
company  or  security  that  has  a  vogue  in  the 
Street.  He  directs  a  group  of  assistants  in  the 
compilation  and  analysis  of  ten-year  records 
of  all  American  corporations  of  note.  So  far  as 
these  records  relate  to  public  service  and  in- 
dustrial companies,  they  are  not  and  cannot  be 
built  up  from  any  standard  framework,  but 
each  is  shaped  out  of  the  characteristics  of  the 


30    THE    PURCHASING    FUNCTION 

particular    business    and    the    nature    of    the 
meagre  material  that  usually  offers. 

38.  In  behalf  of  the  statistician  and  his  col- 
laborators, the  library  shelves  are  weighted 
with  bound  volumes  of  company  mortgages, 
corporation  reports,  gazettes,  financial  period- 
icals and  technical  journals.  The  atlases, 
annuals,  institutional  directories,  current  quo- 
tation sheets  and  dividend  notices  of  two  con- 
tinents are  at  his  elbow.  He  has  standing 
orders  with  the  second-hand  book  dealers  for 
works  that  are  out  of  print — old  railroad  sur- 
veys, special  monographs — and  all  new  publi- 
cations that  have  even  a  collateral  bearing  on 
his  work,  are  submitted  as  soon  as  published. 

39.  Special  Counsel.  The  firm  that  avails 
itself  of  this  systematic  service  also  retains 
special  counsel,  who  give  their  entire  time  to 
the  legal  problems  that  are  constantly  incident 
to  the  prosecution  of  business  affairs  of  scale. 
Likewise  an  engineer  is  retained  for  consulta- 
tion regarding  the  physical  aspects  of  proper- 
ties with  which  the  firm  has,  or  contemplates, 
affiliation.  The  list  of  consultants  and  depart- 
ment specialists  by  no  means  ends  with  these 
advisers.  Others,  with  experience  in  syndicate 
association,  accounting,  and  management,  or 
with  developed  sense  of  market  values,  or  of 
intrinsic  investment  values,  are  at  hand  for  the 
immediate  help  that  their  particular  training 
and  aptitude  makes  possible. 


THE    PURCHASING    FUNCTION     31 

40.  One  Man  Buying.  I  happen  to  know 
fairly  well,  also,  the  buying  department  of  a 
bond  house  that  has  not  yet  grown  to  the  size 
admitting  this  admirable  specialization.  In 
this  smaller  house  all  enterprises  requiring 
new  capital  must  be  investigated  by  one  man 
with  the  slight  statistical  help  obtainable  from 
a  clerk  or  two.  Any  proposition  that  secures 
his  conditional  approval  is  submitted  in  due 
course  to  outside  engineers  and  lawyers,  and 
ultimately  lacks  nothing  in  the  nature  of  pro- 
tection to  investors  that  special  facilities  and 
professional  training  can  contribute.  Not 
because  of  the  lawyers  and  engineers,  primari- 
ly, but  because  of  the  character  of  the  investi- 
gator himself,  I  would  trust  to  the  safety  of 
the  bonds  this  firm  oflFers  as  implicitly  as  to 
that  of  similar  bonds  of  any  other  house  in  the 
Street. 

This  merely  illustrates  what  we  all  know, 
that  elaborate  specialization  and  scientific 
methods  are  supplements  of,  not  substitutes 
for  old-fashioned  horse  sense  and  business 
judgment. 

41.  That  this  smaller  house  has  no  well- 
articulated  statistical  department  is  not  be- 
cause of  narrow  unbelief — far  from  it — but 
because  it  must  perform  all  its  functions  ac- 
cording to  scale :  its  buying  must  bear  definite 
relation  to  its  selling.     The  handicaps  of  such 


34    THE    PURCHASING    FUNCTION 

stopped.  About  a  year  ago  I  was  discussing 
with  the  vice-president  of  one  of  the  Wall 
Street  national  banks  the  very  intimate  rela- 
tion between  the  course  of  active  listed  bond 
prices  and  the  ratio  of  loans  to  deposits  in  the 
national  banks  of  the  country — both  expres- 
sions of  credit  conditions — and  suggested  to 
him  the  possibility  of  building  an  antecedent 
chart  from  banking  and  other  credit  conditions 
that  would  determine  this  ratio  of  loans  to 
deposits  and  therefore  determine  at  any  time 
the  advisability  of  entering  the  market  to  buy 
bonds.  The  subject  was  of  such  importance 
that  I  was  encouraged  with  an  ofifer  of  assist- 
ance, and  even  collaboration,  which  I  could 
not  accept  at  the  time.  Fortunately  this  labor 
has  now  been  saved  and  the  object  apparently 
attained  by  others  more  competent  and  better 
equipped  than  I  for  such  work. 

46.  Let  it  be  said  for  the  benefit  of  business 
men  in  general  that  studies  into  fundamental 
conditions  can  be  related  to  any  business. 
Certain  sets  of  statistics  will  have  more  weight 
in  some  activities  than  in  others.  Presumably 
immigration  figures  are  of  more  immediate 
interest  to  steamship  companies  than  to  rail- 
roads, and  crop  conditions  of  more  interest  to 
railroads  than  to  steamship  companies;  but 
country-wide  prosperity  is  of  immediate  in- 
terest  to   all,   and   so   also   is   the   price-level. 


THE    PURCHASING    FUNCTION     35 

In  so  far  as  success  in  any  business  is  separated 
from  failure  by  the  purchase  of  materials, 
labor  and  capital  when  they  are  cheap  and 
the  sale  of  them  when  they  are  dear,  success 
is  to  be  won  by  deference  to  a  reliable  and 
comprehensive  system  of  financial  service. 
Bond  buyers  are  only  one  among  many  classes 
that  may  be  benefited. 

47.  Railroads  as  Scientific  Financiers.  It  is 
natural  that  the  railroads  should  first  awake 
to  the  possibility  of  really  scientific  financing. 
Their  association  with  bankers  and  banking 
principles  is  so  intimate  and  of  such  long 
standing  that  they  have  become  conversant 
with  the  art  of  buying  and  selling  capital. 
They  buy  long-time  credit  far  in  excess 
of  immediate  needs  when  money  is  plenty, 
and  short-time  credit  at  higher  rates  when 
money  is  scarce.  The  New  Haven  Road  is 
especially  alert  to  take  advantage  of  changing 
interest  conditions.  Of  late  the  example  of  the 
railroads  has  been  followed  by  other  large 
corporations.  In  either  case  the  less  sophis- 
ticated investing  public  are  willing  to  seize 
the  short  end  of  the  exchange.  With  the 
growth  in  power  to  diagnose  fundamental  con- 
ditions all  business  men  at  least  will  be  on  the 
same  plane  of  opportunity  to  profit  by  the 
revolutions  of  the  trade  cycle. 

48.  Buying  to  Satisfy  Clients.     The  buyer  of 


36    THE    PURCHASING    FUNCTION 

bonds  for  a  banking  house  has  other  big  gen- 
eral problems  besides  these  concerning  the 
proper  time  and  price  for  making  commit- 
ments. The  wares  he  offers  for  sale  must  be 
suited  to  the  needs  of  his  clientele.  To  a  cer- 
tain extent  he  may  modify  these  needs.  He 
may  "educate  the  taste"  of  his  patrons.  To 
a  certain  extent  he  may  seek  the  patronage  of 
the  class  of  investors  who  want  the  kind  of 
thing  he  is  willing  to  sell.  If  he  is  a  big  man, 
and  his  wares  are  not  moving  as  rapidly  as 
they  should,  he  may  change  his  entire  selling 
program — he  will  do  almost  anything  but  take 
a  deliberate  risk  for  which  his  customers,  and 
therefore  his  house,  must  ultimately  pay. 

49.  The  Professional  Standard.  Perhaps 
many,  whether  engaged  in  financial  work  or 
not,  will  consider  the  investment  standard  too 
idealistic — impossible  of  maintenance  outside 
of  print.  This  is  absolutely  wrong.  My  own 
bond  associations  have  been  largely  with 
houses  that  refuse  to  take  what  appear  to  be 
speculative  risks,  and  my  experience  is  not 
exceptional.  To  be  sure,  there  is  nothing  il- 
legitimate in  the  assumption  of  risk  or  in  the 
offer  of  speculative  paper  by  firms  engaged  in 
that  kind  of  business ;  but  deliberate  hazard 
or  avoidable  speculation  are  foreign  to  the 
better  American  retail  bond  houses. 

50.  There  is  a  firm  operating  in  the  East, 
whose  senior  members   have   grown  gray  in 


THE    PURCHASING    FUNCTION     37 

the  selling  of  savings  bank  bonds.  In  the  past 
this  policy  yielded  adequate  profits,  an  envi- 
able reputation,  and,  not  least,  the  satisfaction 
of  never  having  sold  a  security  that  occa- 
sioned loss.  But  the  profit  in  savings  bank 
bonds,  always  relatively  narrow,  has  lessened 
considerably  in  recent  years  by  increased  com- 
petition. The  patronage  of  a  savings  bank  can 
no  more  be  monopolized  than  that  of  private 
investors,  for  the  nature  of  "legal"  securities 
makes  almost  superfluous  the  endorsement  of 
the  vendor.  So  competition  in  savings  banks 
selling  is  of  the  freest  kind,  and  a  house  that 
specializes  in  it  has  no  insuperable  advantage 
over  a  house  that  caters  to  more  diversified 
and  profitable  patronage.  A  change  of  bond- 
buying  policy  is  possible  in  this  house  and 
others  similarly  situated,  upon  the  retirement 
of  senior  interests,  but  the  problem  is  vital 
and  requires  ultimate  solution. 

51.  There  is,  on  the  other  hand,  a  house  not 
confined  to  Eastern  selling  that  some  years 
ago  changed  its  major  financial  associations  • 
because  of  a  difference  of  opinion  as  to  what 
constituted  "legitimate"  issues.  For  a  while 
it  was  reasonably  successful  in  disposing  of 
a  class  of  securities  in  which  there  was  a  very 
wide  margin  of  profit,  but  for  which  there  was 
no  general  market  at  all.  This  firm  is  now 
confronted  with  a  dissatisfied  and  diminished 
clientele  and  the  difficult  task  of  rehabilitating 


431741 


38    THE    PURCHASING    FUNCTION 

a  threadbare  reputation  by  return  to  old-line 
securities. 

52.  The  Boston  bond  firms,  as  a  whole,  have 
to  meet  a  new  and  serious  difficulty  arising 
from  the  increased  activities  of  Massachusetts 
assessors.  The  tax  rate  in  Massachusetts 
ranges  close  to  2  per  cent.  Undoubtedly 
there  is  a  greater  amount  of  security  invest- 
ment per  capita  in  Massachusetts  than  in  any 
other  State  in  the  Union.  Consequently,  tax- 
exempt  bonds  seldom  yield  3>4  per  cent.,  and 
yet  a  bond  on  which  taxes  are  paid  must  yield 
53^2  per  cent. — in  other  words,  must  be  at 
least  second  grade,  to  suffer  the  tax  and  make 
return  equivalent  to  tax-exempt  bonds. 

53.  It  is  well  enough  to  deplore  the  short- 
sightedness of  legislation  that  handicaps  in- 
vestment and  encourages  speculation,  but  the 
bond  houses  must  meet  conditions  as  well  as 
theories.  As  the  result  of  this  Massachusetts 
situation  the  Boston  bond  houses  are  begin- 
ning to  handle  the  stocks  of  Massachusetts 
corporations,  which  are  tax-exempt  within  the 
State.  In  some  cases  these  stocks  are  not 
mentioned  in  the  general  circulars  of  the  bond 
houses,  but  are  sold  entirely  by  personal  soli- 
citation. In  New  York,  as  we  all  know,  one  or 
two  bond  houses  of  high  repute  publicly  adver- 
tise for  sale  the  preferred  stocks  of  industrial 
companies.  Will  this  practice  become  general, 
and  if  so,  will  it  alter  the  confidential  relation 


THE    PURCHASING    FUNCTION     39 

between  firm  and  client  that  has  been  estab- 
lished at  such  pains? 

54.  The  Effect  of  Interest  Rates  on  Bond 
Buying.  A  cause  more  general  than  the  ac- 
tivity of  tax  assessors  has  been  at  work  for  the 
past  few  years  compelling  a  shift  of  sentiment 
and  policy  in  bond  buying,  namely,  the  rise  in 
interest  rates.  This  is  a  phenomenon  that 
Moody's  Magazine  has  the  distinction  of  first 
bringing  to  public  attention  in  this  country. 
Elsewhere  I  take  issue  with  the  extreme  stand 
of  some  of  Moody's  contributors  who  see  little 
in  the  advance  of  rates  except  the  effect  of  an 
increased  annual  production  of  gold.*  There 
is  not  space  here  to  rehearse  the  controversy, 
but  it  is  of  importance  to  bond  houses  in 
shaping  their  buying  policy  and  their  methods 
of  financing  corporations  to  know  whether  this 
advance  in  rates  is  founded  on  permanent  con- 
ditions that  must  be  recognized  and  met,  or 
on  transitory  circumstances  such  as  an  exces- 
sive tariff  and  congestion  of  population,  that 
may  disappear  before  it  is  necessary  to  adopt 
radical  changes  in  selling  policy  to  meet  them. 

55.  If  the  good  railroad  refunding  issues 
are  permanently  headed  from  a  4  per  cent,  to  a 
4J^  per  cent,  basis  it  may  mean  that  inactive 
public  service  bonds  hitherto  worth  a  5'>4  per 
cent,    basis,    will    be    worth    only    a    6    per 


•Note.  The    Principles   of   Bond    Investment,   chapter   on   "The 
Future  of   Bond   Prices." 


40    THE    PURCHASING    FUNCTION 

cent,  basis.  This  in  turn  may  mean  the  vogue 
of  6  per  cent,  bonds  selling  at  about  par  rather 
than  5  per  cent,  bonds  selling  at  a  discount ;  or 
it  may  mean  a  5  per  cent,  bond  with  a  stock 
bonus.  Apart  from  the  unholiness  of  stock 
in  general,  once  the  investor  gets  the  bonus 
habit  he  is  hard  to  cure.  It  is  still  a  sign  of 
transition  in  interest  rates,  not  a  sign  of  be- 
nevolence or  necessity,  when  stock  is  "given 
away"  with  bonds.  When  trading  stamps  are 
of  economic  benefit  to  trade,  stock  bonuses 
will  be  to  finance. 

56.  Stock  Bonuses.  Yet  this  in  turn,  is 
hardly  a  fair  statement.  Stock  bonuses  come 
to  the  bond  house  in  part  payment  for  the 
capital  loaned,  and  the  offer  of  these  bonuses 
to  clients  is  merely  the  offer  to  share  pros- 
pective profits  from  future  operations  of  the 
obligated  company.  It  is  sounder  financing, 
however,  for  the  bond  house  to  charge  less 
for  the  capital  it  loans,  when  it  buys  the  bonds, 
and  to  offer  the  bonds  to  its  clients  at  a  corre- 
spondingly lower  figure.  I  believe  that,  in  the 
long  run,  more  is  lost  than  gained  by  encour- 
aging speculative  interest  from  the  ultimate 
furnishers  of  investment  capital. 

57.  Enough  has  been  said  to  outline  the 
gravity  of  general  bond  buying  problems. 
The  succeeding  chapter  will  deal  with  the 
purchasing  function  in  relation  to  particular 
types  of  public  and  private  corporation  loans. 


CHAPTER  III. 
BUYING  MUNICIPALS. 

58.  The  previous  chapters  outlined  some  of 
the  principal  problems  and  kinds  of  assistance, 
statistical  and  advisory,  that  are  met  in  the 
routine  of  bond  buying.  It  is  left  to  differenti- 
ate the  problems  and  helps  that  apply  to  par- 
ticular types  of  bonds. 

59.  The  Ten  Investment  Elements.  In 
the  first  place,  we  must  come  to  some  con- 
clusions regarding  the  investment  qualities 
we  seek  in  examining  the  loans  submitted  for 
purchase.  A  careful  survey  of  all  possible  ex- 
cellences yields  us  ten  elements  for  the  ideal 
investment.' 

Security  of  principal. 

Stability  of  income  (or  security  of  interest). 

A  fair  return. 

Marketability.  ~|   ^  .,  .,. 

,,  ,  ,,  ,    y  Convertibility. 

Value  as  collateral,  j 

Tax  exemption. 

Freedom  from  care. 

Acceptable  duration. 

Acceptable  denomination. 

Possil)ility  of  appreciation. 

60.  Whether  the  possibility  of  appreciation 
is  not  purely  a  speculative  quality  may  be  open 


I  The    Elements   of   an    Iflcal    Investment,   Chapter    III    of  The 
Principles    of    Bond    Investment. 

41 


42  BUYING  MUNICIPALS 

to  discussion,  but  otherwise  the  list  is  prob- 
ably unquestionable  and  comprehensive.  We 
may  say  then  that  if  a  bond  house  can  obtain 
for  its  clients  an  issue  with  (1)  principal 
reasonably  secure,  (2)  interest  payments  regu- 
lar and  certain,  (3)  a  fair  return  in  income, 
(4)  a  fairly  responsive  market,  (5)  hypothe- 
cary value  at  the  banks — an  issue,  (6)  that  is 
free  from  direct  tax,  and  (7)  requires  merely 
semi-annual  coupon  clipping,  and  (8)  matures 
after  a  satisfactory  lapse  of  time,  and  (9)  comes 
in  convenient  units  of  denomination  (small  for 
the  frugal  poor,  and  large  for  the  rich,  so  as 
not  to  crowd  the  strong  box),  and  (10)  has 
as  good  a  chance  of  appreciating  as  of  depre- 
ciating when  its  qualities  become  more  gener- 
ally recognized — well,  a  bond  house  cannot 
furnish  such  an  issue,  for  it  does  not  exist.* 

61.  Evidently,  then,  there  is  plenty  of  room 
for  discrimination  and  selective  judgment  in 
bond  buying.  Incidentally,  however,  is  there 
any  other  kind  of  investment  that  will  so 
nearly  meet  these  ten  requirements?  Will 
mortgages? 

62.  The  three  investment  qualities  that  re- 
ceive the  most  consideration  are  security, 
income,  and  marketability.  Obviously  all  three 
cannot   exist   in   a   high    degree   in   the   same 


•Note.     The  Principles  of  Bond  Investment,  Chapter  on  "The 
Elements  of  an  Ideal  Investment." 


BUYING  MUNICIPALS  43 

paper.  If  the  investment  is  safe  it  cannot  re- 
turn a  high  rate  of  interest  and  at  the  same 
time  have  a  broad  and  active  market,  for  such 
a  market  implies  competitive  demand,  and  the 
competition  for  a  security  that  was  at  once  of 
safe  and  high  yield  would  immediately  bid  up 
the  price  and  thus  lower  the  yield. 

63.  Therefore,  assuming  a  good  security, 
the  first  problem  of  the  bond  house  is  the 
choice  it  must  make  for  its  specialization  be- 
tween large  transactions  with  small  profits  in 
issues  with  broad  markets,  and  small  trans- 
actions with  much  larger  profits  in  issues  with- 
out vogue  or  reputation. 

64.  The  Principal  Function  of  the  Bond 
Houses.  If,  because  of  prejudice,  or  want  of 
knowledge  concerning  its  qualities,  an  issue 
is  without  vogue,  and  has  to  be  sold  painstak- 
ingly by  personal  solicitation,  it  may  be  both 
safe  and  of  high  return.  //  is  the  principal  and 
thoroughly  commendable  function  of  the  better 
American  bond  houses  to  sell  to  their  clients  is- 
sues of  bonds  which  have  unimpeachable  security 
and  yet  an  income  considerably  higher  than  would 
be  the  case  zvere  the  issues  well  knoivn  to  the  in- 
vesting public. 

65.  Setting  aside  United  States  bonds,  which 
(with  the  possible  exception  of  the  insular 
issues)  are  not  truly  investment  paper,  we 
have  as  representative  of  security,  vogue  and 


44  BUYING  MUNICIPALS 

market,  at  the  expense  of  income,  the  great 
body  of  American  Civil  Loans,  viz.,  state, 
county,  city  and  town,  and  tax  district  bonds. 

66.  At  the  opposite  extreme,  representative 
of  reasonable  security  and  greater  income,  at 
the  expense  of  vogue  or  market,  we  have  pub- 
lic service  corporation  bonds,  and  some  "in- 
dustrials." 

67.  In  the  middle  ground  are  railroad  bonds, 
offering,  as  a  class,  less  security  than  civil 
loans,  more  than  public  utility  loans,  and  in- 
clining toward  marketability  rather  than  in- 
come. Let  us  consider  each  of  these  classes 
in  turn. 

68.  Municipal  Buying,  History  makes  rap- 
idly in  civil  bond  law.  If  it  were  not  for  the 
Riddlebergers,  the  Tennessee  Settlements,  and 
a  few  others.  Wall  Street  would  have  forgot- 
ten before  this  that  nine  states  repudiated  their 
debts  between  1870  and  1884.  The  constitu- 
tions and  statutes  of  so  many  commonwealths 
now  forbid  the  incurrence  of  more  than  nomi- 
nal state  debt,  and  the  loans  that  do  issue  are 
of  such  special  market,  that  these,  as  well  as 
the  governments,  may  be  omitted  from  this 
brief  discussion. 

69.  The  problem  of  buying  the  other  civil 
loans,  the  municipals  proper  and  the  quasi- 
municipals  such  as  county  and  tax  district 
bonds,  may  be  divided  according  to  the  charac- 


BUYING  MUNICIPALS  45 

ter  of  their  investment  destination.  From  the 
business  point  of  view  municipals  are  broadly 
either  "legals"  or  "general  market"  bonds. 

70.  The  Buying  of  "Legals."  By  "legals," 
of  course,  are  meant  municipals  that  conform 
to  the  high  requirements  of  the  older,  richer 
states  governing  the  investment  of  savings 
bank  deposits  and  trust  funds.  In  the  nature 
of  the  case  the  legals  are,  in  general,  superior 
to  the  general  market  municipals. 

71.  In  purchasing  legals  the  question  of 
security  is  almost  nil.  No  banking  house,  for 
instance,  would  or  could  be  held  morally  re- 
sponsible for  the  default  of  any  municipal  issue 
that  is  a  legal  investment  for  the  savings  banks 
of  Massachusetts  or  New  York.  Legality  for 
savings  bank  investment  and  legality  of  issu- 
ance by  the  municipality  are  entirely  distinct 
matters.  The  questions  of  legality  of  issuance 
and  validity  are  quite  apart  from  those  of  the 
financial  competency  or  the  good  faith  of  a 
city.  It  is  not  a  function  of  the  bond  houses 
to  establish  legality  of  issuance  but  that  of 
their  attorneys.  It  may  astonish  many  to 
learn  that  a  record  of  sales  I  kept  in  1907,  of 
the  more  important  municipal  issues  of  that 
year,  shows  that  of  a  total  of  $200,000,000  of 
municipal  and  state  bonds  issued,  some  $4,- 
000,000  or  2  per  cent.,  divided  among  65  loans, 
were  finally  declined  by  those  who  had  pur- 


46  BUYING  MUNICIPALS 

chased  them  subject  to  approval  of  counsel ; 
and  usually,  but  not  always,  declined  on  the 
ground  that  the  issue  was  invalid  because  of 
some  lack  of  compliance  with  minor  require- 
ments of  law.  This  $4,000,000  does  not  take 
into  account  a  very  much  larger  amount  of 
issues  that  the  attorney  of  the  purchaser  found 
insufficiently  protected  by  law,  but  that  by 
further  acts  at  his  suggestion,  the  issuing  com- 
munity was  able  to  validate  completely  with- 
out formal  resale. 

72.  The  Bond  Attorney.  Not  all  bond  attor- 
neys, however,  are  competent.  Even  an  ap- 
parently "legal"  municipal  may  be  unsafe  if 
its  validity  has  been  passed  upon  by  a  lawyer 
who  is  more  interested  in  making  immediate 
profits  for  his  client  the  bond  house,  than  con- 
siderate for  his  reputation  and  its  future  wel- 
fare. Any  bond  house  dealing  in  municipals 
can  name  certain  attorneys  whose  "legal  opin- 
ion" is  worthless  in  its  eyes  because  of  in- 
competence or  lack  of  scruple.  Not  long  ago 
one  such  attorney  in  New  York  State  accepted 
as  valid  an  issue  of  bonds  signed  by  a  man 
who  had  never  been  appointed  or  elected  to 
the  ofiice  designated  under  his  signature. 

It  is  the  business  of  the  bond  house  to  pro- 
tect its  clients  against  the  work  of  these  char- 
latans. They  are  very  few  and  far  between, 
and  lower  but  little  the  high  plane  of  legal 


BUYING  MUNICIPALS  47 

skill  and  ethics  that  are  devoted  to  safeguard- 
ing American  bond  issues. 

73.  The  SelHng  Cost  and  Price  of  Legals. 
The  buying  of  legals  as  a  mercantile  rather 
than  legal  problem  narrows  down  to  technical 
skill  in  sensing  the  current  demand  and  steer- 
ing the  bid  in  that  very  narrow  channel  of 
profit  that  lies  between  the  Scylla  of  com- 
petitive bids  and  the  Charybdis  of  too  high 
an  asking  price. 

It  is  easier  to  guess  what  price  the  bonds 
will  bring  when  sold  to  the  public,  than  what 
price  the  other  houses  will  bid  at  the  public 
sale ;  but  conceding  the  municipal  buyer  could 
be  fairly  certain  of  both,  he  is  not  yet  saved. 
He  must  compute  the  selling  cost  to  him  per 
bond,  and  be  sure,  humanly  speaking,  of  a 
margin  of  profit.  How  many  houses  do  this? 
How  many  of  the  two  thousand  bond  firms 
in  the  United  States  have  any  intelligent 
cost  accounting?  It  may  be  interesting  to 
know  that  a  certain  house  that  does  a  large 
and  very  general  bond  business  throughout 
the  country  computes  the  selling  cost  at  nearly 
$14  a  $1,000  bond.  This  includes  the  cost  of 
the  slow  moving  "specialties,"  but  also  the 
cost  of  mere  brokerage  transactions  on  which 
the  profit  may  be  only  1-32,  or  31  cents  a  bond. 

74.  At  the  present  time  the  gross  profit  in 
selling  legal  municipals  surely  docs  not  exceed 


48  BUYING  MUNICIPALS 

$10  a  bond  or  one  per  cent.  I  believe  it  is  not 
over  $7.50  a  bond.  If  these  statements  of  costs 
and  profits  are  approximately  correct,  are  the 
bond  houses  charging  too  much  for  the  serv- 
ices they  perform?  If  these  statements  are 
correct,  are  institutions  and  individuals  ordi- 
narily wise  in  bidding  direct  for  bonds  at  pub- 
lic sale,  rather  than  accepting  the  established 
market  after  the  sale?  The  answer  will  be 
found  by  study  of  the  list  of  bidders,  and  the 
amounts  bid,  in  any  sale  of  New  York  City 
bonds.  If  these  statements  are  correct,  are 
municipalities  wise  in  trying  to  sell  their  loans, 
bond  by  bond,  "over  the  counter,"  rather  than 
by  paying,  as  a  matter  of  economy,  the  middle- 
man's profit? 

75.  Carrying  Charges.  It  would  not  be  pos- 
sible for  houses  to  live  on  such  small  profits  if 
the  bonds  did  not  in  the  long  run  "carry  them- 
selves," i.  e.,  produce  a  suflficient  coupon  in- 
come to  oflfset  the  interest  charges  of  their 
hypothecation  at  the  banks.  A  diamond  or 
wool  merchant,  it  is  to  be  observed,  or  a 
merchant  in  any  other  commodity,  has  not 
this  advantage  of  a  self-supporting  collateral. 

76.  With  a  gross  one  per  cent,  profit,  that 
may  be  wiped  out  by  a  change  in  the  market 
conditions,  it  is  essential  that  the  bidding  for 
legal  municipals  should  be  most  circumspe(;t. 
With  this  in  view  a  properly  equipped  house 


BUYING  MUNICIPALS  49 

will  keep  on  its  books  a  record  of  past  bidding 
for  all  municipal  issues  of  consequence.  This 
record  will  show  the  amount  of  the  flotation, 
the  face  or  coupon  interest  rate,  the  duration, 
the  purpose  of  the  issue,  the  date  of  sale,  the 
price  the  bonds  brought  at  the  sale,  the  net 
yield  at  this  price,  the  name  of  the  purchaser, 
and,  when  possible,  the  basis  price  or  net 
yield  that  the  bonds  brought  when  retailed. 
Every  one  of  these  facts  is  of  prime  importance 
in  gauging  the  price  to  pay  for  municipals,  for 
one  should  never,  or  almost  never,  bid  with  a 
first  thought  on  competitive  bids,  but  rather 
with  heed  first  to  the  price  that  the  market 
will  bear,  and  next  to  the  margin  of  profit  that 
is  acceptable  under  the  conditions. 

One  house  has  just  recompiled  such  a  sales 
record,  which  consumed  the  time  of  two  men 
for  six  months. 

77.  The  application  of  these  details  of  issue 
to  prospective  bidding  becomes  instinctive  to 
a  professional  bond  buyer.  He  will  run 
through  a  few  pages  of  proposals  for  bids  and 
check  ofT  with  almost  unerring  accuracy  the 
cases  in  which  no  bids  will  be  received.  Usu- 
ally he  will  err  only  when  a  local  bank,  for 
advertising  or  jjolitical  purposes,  bids  above 
the  market. 

78.  We  will  say  that  the  rural  County  of 
X in    New    York    State   proposes    at    the 


50  BUYING  MUNICIPALS 

present  time  to  issue  $20,000  4%%  bonds 
maturing  serially  from  date  $2,000  each  year. 
This  item  may  not  interest  the  experienced 
buyer.  In  the  first  place,  the  issue  is  a  small 
one — hardly  worth  printing  circulars  for.  Sec- 
ondly, bonds  in  New  York  State  may  not  be 
sold  by  municipalities  below  par:  in  this  case 
a  4.25  per  cent,  basis.  The  best  basis  that  a 
bond  house  can  possibly  expect  to  get  for  this 
bond  in  this  market  is  4.15  per  cent.  But  the 
difference  in  a  4^4%  bond  of  this  duration  be- 
tween a  4.25  and  a  4.15  per  cent,  basis  is  .474 
or  $4.74.  This  gross  profit  is  or  should  be 
too  narrow  to  draw  out  any  bids. 

79.  Unintelligent  Proposals  for  Municipals. 
Another  aspect  of  the  unintelligent  offering  of 
municipal  loans  is  presented  in  the  following 
illustration.  Some  time  ago  a  municipality 
within  gunshot  of  New  York  awarded  an  issue 
of  bonds  to  various  bidders  at  a  price  several 
hundred  dollars  less  than  the  offer  of  another 
house  for  "all  or  none."  Their  action  caused 
some  comment  at  the  time,  although  it  was 
perfectly  legal  and  apparently  in  good  faith. 
In  the  light  of  that  experience  what  shall  we 
say  of  the  stewardship  of  their  officials  when 
a  year  or  so  later  the  same  mistake  was  re- 
peated? The  municipality  made  three  awards 
at  the  sale,  amounting  to  $153,262.76,  whereas 
if  the  bonds  had  been  awarded  in  one  lot  to 


BUYING  MUNICIPALS  51 

the  highest  bidder  the  citizens  would  have  re- 
ceived $153,589.96.  Was  not  this  $327.20  dif- 
ference worth  saving?  A  sHghtly  different 
method  of  advertising  the  sale  would  have 
accomplished  the  result. 

80.  Municipal  Bond  Bureaus.  I  have  already- 
mentioned  financial  service  bureaus  that  make 
relatively  easy  the  statistical  work  of  bond 
houses.  There  are  at  present  two  daily  publi- 
cations that  keep  bond  concerns  well  posted 
on  forthcoming  municipal  sales  and  the  terms 
and  forms  in  which  proposals  may  or  must  be 
couched.  They  also  publish  lists  of  bidders 
at  recent  sales,  with  the  prices  obtained. 
Through  the  services  of  these  bureaus  the 
necessary  data  for  intelligent  buying  of 
"legals"  may  be  collected  by  merely  clerical 
effort. 

81.  General  Market  Municipals.  The  prob- 
lem of  buying  "general  market"  municipals  is 
no  such  simple  matter.  In  these  bonds  security 
may  seldom  be  taken  for  granted.  It  is  taken 
for  granted  much  more  generally  than  proper. 
The  financial  memory  (to  repeat)  is  proverbi- 
ally short.  Each  generation  forgets  the  fiscal 
follies  and  disasters  of  the  preceding.  History 
in  finance  makes  so  rapidly :  When  in  1839, 
during  that  long  business  depression  in  Amer- 
ica that  produced  the  first  repudiation  period, 
Raring  Brothers  of  London  inquired  of  Daniel 


52  BUYING  MUNICIPALS 

Webster  concerning  "the  measure  of  security 
which  the  purchasers  of  bond  issues  by  the 
states  of  the  American  Union  would  have  for 
their  investment,"  he  wrote  in  reply : 

"I  believe  there  is  no  country  upon  earth — 
not  even  that  of  the  injured  creditor — in  which 
such  a  proceeding  (repudiation)  would  meet 
with  less  countenance  or  indulgence  than  it 
would  receive  from  the  great  mass  of  American 
people." 

Yet  within  two  years  Governor  McNutt  of 
Mississippi  had  recommended,  and  within 
three  years  the  legislatures  of  Mississippi  and 
Florida  had  voted  the  repudiation  of  nearly 
$9,000,000  of  bonds. 

82.  Municipal  Defaults.  Did  the  default  of 
these  or  of  five  other  states  in  the  forties  deter 
European  or  American  investors  from  further 
purchases?  Not  at  all.  Instead  of  using  busi- 
ness sense,  they  continued  trusting  and  buying, 
and  losing.  Nothing  daunted  they  bought 
after  the  War,  overlooking  the  war  time  de- 
fault of  three  states ;  they  bought  in  the  eigh- 
ties and  nineties  in  spite  of  the  repudiation  of 
nine  states  in  almost  as  many  years.  If  the 
men  of  Lombard  and  Wall  Streets  and  count- 
less other  bond  buyers  had  taken  the  same 
pains  in  1870  or  thereafter  to  acquaint  them- 
selves with  the  factors  of  state  credit,  and  of 
the   errors   of   the   legislatures   and   investing 


BUYING  MUNICIPALS  53 

public  in  the  preceding  generation,  as  they  now 
do  in  the  purchase  of  railroad  securities,  fewer 
bonds  would  have  been  floated  at  that  time 
and  less  state  paper  would  now  repose  in  an- 
cient pigeon  holes. 

83.  The  story  of  municipal  loans  is  the  same, 
only  worse.  How  many  men  now  active  in  the 
financial  district  realize  that  thirty  years  ago 
the  Mississippi  Valley  gave  up  a  long  list  of 
defaulting  cities,  among  which  were  Duluth, 
Keokuk,  McGregor,  Quincy,  Cairo,  St.  Joseph, 
Cape  Girardeau,  Lawrence,  Topeka,  Nebraska 
City,  Little  Rock,  Helena  in  Arkansas,  Mem- 
phis, Shreveport,  New  Orleans,  Mobile  and 
Houston?  "Of  one  hundred  counties,  town- 
ships and  cities  issuing  bonds  in  Missouri, 
nine-tenths  have  defaulted,"  says  the  North 
American  Review  in  August,  1884. 

84.  The  point  is  not,  of  course,  that  this 
country  will  ever  again  see  a  repetition  of  this 
wholesale  breach  of  faith,  but  that  the  pro- 
posed debts  of  the  weaker  communities,  such 
as  rural  counties,  small  towns  and  taxing  dis- 
tricts, should  receive  the  same  expert  investi- 
gation that  is  given  the  debts  of  private  cor- 
porations. Although  it  is  true  that  not  for 
some  years  has  an  American  municipality  of 
importance  failed  to  meet  its  valid  (obligations, 
nevertheless  numbers  of  small  communities  in 
all  parts  of  the  country  except  New  England 


54  BUYING  MUNICIPALS 

are  at  the  present  time  failing  to  keep  their 
pledges.  In  some  cases  it  is  through  no  obli- 
quity on  the  part  of  the  community ;  in  most 
it  is  the  result  of  official  incompetency  and 
political  unwisdom ;  but  whatever  the  causes, 
they  should  be  studied  by  bond  buyers  that 
loans  produced  under  improper  conditions  may 
be  avoided. 

85.  There  are  millions  of  dollars  of  "Gravel 
Road"  bonds  issued  under  the  Indiana  High- 
way Act  of  1905  (Chapter  167)  that  have  hung 
in  the  balance  between  payment  and  non-pay- 
ment for  some  years  because  they  were  issued 
under  local  and  special  authority.  Originally 
declared  unconstitutional,  they  have  been  fully 
validated  by  a  review  of  the  case  in  the  Su- 
preme Court  of  the  State.  But  they  illustrate 
the  need  of  special  fitness  and  professional 
training  in  the  purchasing  function,  even  in 
this  day,  and  even  for  municipal  loans. 

86.  What  knowledge  and  experience  may 
have  been  accumulated  hitherto  by  the  bond- 
houses  has  only  recently  found  its  way  into 
print.  The  principles  of  municipal  bond  in- 
vestment may  be  thoroughly  explored,  but  only 
within  the  year  have  they  been  codified  and 
published.  We  have  at  least  reached  this 
stage,  that  the  bond  buyers  of  the  big  New 
York  banking  houses  will  refuse  municipal 
loans  they  believe  unsound.    They  have  com- 


BUYING  MUNICIPALS  55 

mon  grounds  for  their  faith.  About  three 
years  ago  a  community  that  is  ahiiost 
within  rifle  shot  of  the  city  olTered  a  loan  in 
New  York  without  success.  It  was  finally 
placed  with  a  Western  house  that  has  since 
failed.  The  bonds  have  defaulted,  but  never- 
theless the  community  has  just  offered  another 
loan.  It  would  have  been  interesting  to  note 
what  house  would  dare  to  purchase  the  bonds. 
It  is  reassuring  to  state  that  no  bids  were 
received. 

87.  The  true  financial  competency  of  a  com- 
munity to  issue,  support  and  acquit  bonded  ob- 
ligations is  not  so  easy  to  ascertain  as  most 
people  suppose.  I  venture  the  assertion  that 
there  are  more  bond  men  who  can  analyze  an 
annual  report  of  the  United  States  Steel  Cor- 
poration than  who  can  analyze  the  financial 
statement  of  the  City  of  New  York.  It  is  not 
important  to  seek  the  reason  for  this  condition 
of  things.  But  let  us  not  underestimate  the 
importance  of  the  purchasing  function  of  the 
bond  houses  as  related  to  municipal  issues. 
That  the  huge  machinery  of  municipal  debt 
creation  and  investment  exchange  runs  so 
smoothly  and  with  such  exceedingly  infrccjuent 
and  unimportant  casualties  is  sufficient  testi- 
mony to  the  financial  health  of  our  bodies 
politic  and  of  our  investment  houses. 


CHAPTER  IV. 
BUYING  RAILROAD  BONDS. 

88.  In  the  preceding  two  chapters  we  dis- 
cussed in  as  much  detail  as  circumstances  per- 
mitted the  purchasing  function  of  the  bond 
houses,  in  its  broad  aspects  of  public  and  firm 
policy,  and  as  related  particularly  to  municipal 
issues.  There  remain  to  be  considered  the 
special  principles  that  govern  the  buying  of 
railroad  and  other  private  corporation  bonds. 
This  paper  will  be  devoted  to  the  railroad 
issues. 

89.  Common  Characteristics  of  Railroad  and 
Municipal  Bonds.  Railroad  and  municipal 
bond  buying  have  some  phases  in  common. 
Perhaps  in  both  it  is  fair  to  say  that  an  investi- 
gation of  the  ability  of  the  obligor  corporation 
to  meet  its  engagements  is  not  usually  the 
chief  consideration  at  the  time  of  purchase. 
In  other  words  the  equities  are  usually  suf- 
ficient to  be  accepted  without  that  degree  of 
exhaustive  scrutiny  which  must  be  given  to 
the  equities  of  public  service  and  industrial 
corporations.  Secondly,  the  ultimate  destina- 
tion of  a  large  part  of  both  municipal  and 
railroad  debt  is  institutional,  therefore  the 
rapidity  and  capacity  of  absorption  or  "diges- 
tion" is  relatively  great,  and  these  two  types 

56 


BUYING  RAILROAD  BONDS         57 

may  be  handled  on  a  relatively  narrow  margin 
of  profit.  The  margin  for  railroad  bonds  is  not 
the  scant  three-quarters  to  one  per  cent. 
($7.50  to  $10.00  per  $1,000  bond)  we  assumed 
for  municipals  of  the  "legal  for  savings  banks" 
type,  but  let  us  say  four  or  five  per  cent. 
Moreover,  the  market  for  railroad  bonds  (so 
large  a  part  of  which  is  listed)  is  self-regulat- 
ing, even  to  a  greater  extent  than  the  market 
for  municipals,  therefore  the  initial  sale  profit 
does  not  have  to  contain  provision  for  subse- 
quent cost  of  market  support — a  generally  un- 
considered expense  of  floating  "specialty"  cor- 
poration bonds  by  houses  that  take  care  of 
their  customers. 

90.  A  third  point  of  likeness  between  these 
types  is  their  division  into  two  broad  classes, 
the  one  in  which  security,  in  the  ordinary 
sense,  may  be  taken  for  granted  almost  abso- 
lutely, so  that  current  money  rates,  and  profits, 
determine  the  purchase,  and  the  other  in  which 
the  degree  of  security,  marketability,  etc.,  are 
determining  price  factors. 

91.  On  the  whole,  however,  the  purchase 
of  railroad  bonds  is  more  closely  associated 
with  that  of  corporations  generally  than  with 
that  of  municipals,  because  of  the  very  char- 
acter of  the  debt  and  of  the  issuer. 

92.  Railroad  Bond  Underwriting.  The  buy- 
er of  railroad  bonds  of  the  prominent  systems 


58         BUYING  RAILROAD  BONDS 

faces  a  more  difficult  situation  than  the  buyer 
of  legal  municipals.  At  present  all  the  great 
American  railroad  systems  are  dominated  by 
one  or  another  of,  say,  half-a-dozen  great  banks 
or  banking  houses.  It  is  therefore  practically 
impossible  for  the  "retail"  bond  houses  (the 
kind  described  in  these  pages)  to  purchase 
large  issues  at  first  hand  from  these  railroads, 
and  therefore  to  obtain  the  profits  indicated 
above.  Indeed,  in  a  recent  interview,  a  promi- 
nent Wall  Street  corporation  lawyer  went  so 
far  as  to  declare  that  it  was  next  to  impossible 
for  any  corporation  in  this  country  to  raise 
$10,000,000,  outside  the  great  banking  groups 
provided  the  subscription  would  be  inimical 
to  the  interest  of  any  of  them. 

93.  Underwriting  by  Retail  Houses.  How- 
ever that  may  be,  if  a  "retail"  bond  house 
chooses  to  specialize  in  the  better  railroad 
flotations  it  must  align  itself  with  those 
houses  that  are  willing  to  act  as  secondary 
underwriters.  It  is  then  expected  to  partici- 
pate in  the  sub-underwriting  or  actual  pur- 
chase of  the  majority  of  issues  fathered  by  the 
wholesale  banker  with  which  it  is  affiliated, 
almost  irrespective  of  the  quality  and  price  of 
the  issue,  or  the  condition  of  the  bond  market. 
A  railroad  bond  buyer  needs  tact  as  well  as 
professional  skill,  to  seize  the  horns  of  this 
dilemma,  and  keep  his  house  in  line  for  what 


BUYING  RAILROAD  BONDS         59 

is  safe  and  profitable,  without  giving  offense 
in  declining  what  is  either  unsafe  or  unprof- 
itable. 

94.  This  dilemma  is  by  no  means  imaginary 
or  occasional ;  it  is  an  ever  present  difficulty. 
On  the  one  hand  (as  to  safety),  there  is  con- 
stant temptation  to  relax  in  critical  caution 
and  to  follow  the  crowd  into  some  new  sub- 
scription to  an  uninvestigated  security  that 
promises  profits  overnight.  If  one  could  only 
know  the  amount,  how  startling  would  be  the 
sum  annually  committed  to  subscription  bond 
purchases  for  purely  speculative  objects,  with- 
out any  thought  of  regular  merchandizing  or 
investment,  because  of  telephone  tips,  news- 
paper gossip,  and  neighborly  hearsay !  The 
bond  houses  make  their  share  of  these  blind 
purchases. 

95.  If  you  ask  for  a  copy  of  the  mortgage 
it  isn't  yet  ready  for  distribution,  and  you  are 
a  squeamish  obstructionist.  Yet  one  of  the 
largest  railroad  systems  in  America,  which 
issues  many  millions  of  bonds  almost  every 
year,  through  the  usual  New  York  banking 
channels,  in  the  usual  subscription  manner, 
has  had  a  net  income  for  the  past  three  years 
that  has  averaged  less  than  2)4  per  cent,  of  the 
gross  earnings!  Another  system,  operating 
about  10,000  miles,  during  the  year  1910  con- 
sumed 94^  per  cent,  of  its  gross  earnings  in 


60         BUYING  RAILROAD  BONDS 

mandatory  charges.  During  the  year  of  the 
last  panic  almost  99  per  cent,  of  all  it  earned 
was  eaten  up  in  charges.  Yet  instead  of  lay- 
ing by  for  the  next  panic  this  road  is  again 
paying  dividends  on  many  millions  of  stock. 

96.  On  the  other  hand  (as  to  profits),  cur- 
rent railroad  subscription  prices  are  put  as  high 
as  the  market  will  possibly  bear/  and  the 
eighth,  quarter,  half,  or  one  per  cent.,  or  more, 
that  goes  to  the  retail  houses  for  sub-under- 
writing from  the  big  wholesalers  is  likely  to 
be  wiped  out  before  the  bonds  are  disposed  of 
in  such  a  sagging  bond  market  as  we  have 
become  thoroughly  familiar  with  in  the  past 
two  or  three  years. 

97.  The  Profits  of  Underwriting.  The  public 
may  not  seem  to  be  as  directly  concerned  with 
the  distribution,  as  with  the  total  amount,  of 
middlemen's  profits  when  great  railroad  cor- 
porations borrow,  but  perhaps  a  warrantable 
interest  can  be  made  to  appear;  moreover,  we 
are  considering  the  work  of  the  bond  houses 
as  such  rather  than  the  economics  of  finance, 
primarily.  Well,  let  us  assume  for  argument's 
sake  that  6  points  (or  per  cent,  on  par)  repre- 
sent the  difference  between  what  the  railroad 
gets  and  the  public  pays  at  the  initial  sale,  and 
that  prior,  or   possibly   subsequent,   to  public 


I  There    has    been    one     notable    exception    during    the    year 
1911-12. 


BUYING  RAILROAD  BONDS         61 

flotation  the  big  wholesaler  assigns  to  three 
retail  houses  at  1^  points  concession  all  bonds 
of  the  issue  on  hand  soon  after  the  public  sale. 
The  three  retail  houses  in  turn  permit  associate 
houses  a  discount  of  34  from  established  prices. 
These  associate  houses,  however,  act  merely  as 
brokers,  whereas  the  three  retailers  mentioned 
have  bought,  paid  for,  and  taken  up  the  bonds 
or  temporary  certificates. 

98.  The  question  arises:  Are  the  profits  of 
the  wholesalers,  the  secondary  underwriters, 
and  the  brokers,  respectively,  proportionate  to 
the  services  performed?  Perhaps  the  interest 
of  the  brokers  in  the  transaction  may  be  omit- 
ted. They  take  no  risk  unless  they  choose  to 
speculate  for  their  own  account;  the  bonds 
they  buy  are  usually  sold  for  the  account  and 
risk  of  others;  therefore  their  profits  are  and 
should  be  nominal. 

99.  But  should  the  wholesaler,  who  may  own 
the  bonds  for  a  week,  who  is  reasonably  cer- 
tain of  their  disposition,  and  has  little  direct 
future  moral  responsibility  to  the  public,  and 
who  is  under  small  direct  selling  expense,  be 
entitled  to  four  times  the  profits  of  the  re- 
tailers on  whom  falls  the  real  burden  of  selling 
and  the  real  risk  of  loss  through  sagging 
prices?  Whether  the  ratio  is  4  to  1  or  less, 
is  it  an  evidence  of  sound  economic  conditions 
in  any  business  when  wholesale  profits  are 
greater  than   retail? 


62         BUYING  RAILROAD  BONDS 

100.  It  may  be  argued  that  the  great  whole- 
salers have  at  command  the  immense  capital 
necessary  for  the  exploitation  of  steam  trans- 
portation systems  and  are  entitled  to  rewards 
commensurate  with  the  advantage  of  their 
capitalistic  entrenchment.  There  are  dozens 
of  retail  houses  that,  under  an  unsubsidized 
banking  system,  and  in  "joint  account,"  would 
be  capable  of  handling  the  largest  corpora- 
tion loans  that  find  ultimate  placement  on  this 
side  of  the  water — indeed  the  same  houses 
that  now  are  the  immediate  repositories  of  the 
loans  until  ultimate  public  absorption.  Their 
federated  banking  resources  are  drawn  upon 
almost  as  extensively,  under  present  circum- 
stances, as  if  the  wholesalers  were  not  in- 
volved. 

101.  A  Pennsylvania  Railroad  Flotation. 
Two  or  three  years  ago  when  the  Pennsyl- 
vania Railroad  contemplated  the  issuance  of  a 
loan  of  many  millions  one  of  my  good  Boston 
friends  (you  may  remember  the  newspaper 
story)  ofifered  with  perfectly  good  financial 
warrant  to  bid  for  the  bonds  at  public  sale  an 
amount  in  excess  of  the  price  reputed  to  have 
been  arranged  with  the  usual  wholesale  under- 
writers. This  offer  was  not  accepted,  although 
he  was  courteously  given  interview  with  the 
president  and  other  officials  of  the  road.  The 
publicity  of  the  case  made  this  much  recog- 


BUYING  RAILROAD  BONDS         63 

nition  advisable.  The  reason  the  offer  was  not 
accepted  may  perhaps  be  found  in  the  state- 
ment of  the  corporation  attorney,  already 
quoted,  concerning  the  impossibility  of  ob- 
taining large  loans  without  the  acquiescence 
of  financial  autocracy. 

102.  Direct  buying  of  railroad  debts  by  the 
retail  bond  houses  would  tend,  more  than  at 
present,  to  separate  the  banking  interests  from 
the  proprietary  interests  and  more  closely  to 
associate  the  banking  interests  with  the  invest- 
ment interests, — both  movements  highly  to  be 
desired. 

103.  There  is  no  opprobrium  to  be  attached 
to  the  centralization  of  banking  power.  It  is 
an  inevitable  phase  of  the  industrial  evolution 
of  the  past  decade.  It  seems  possible  now 
that  centralization  may  be  followed  by  disin- 
tegration, but  more  probably  by  governmental 
regulation,  built  on  any  convenient  legal  prin- 
ciple that  comes  to  hand  when  the  time  is 
ripe.  I  believe  that,  whatever  the  event,  pres- 
ent artificial  conditions  cannot  continue  indef- 
initely, and  that  it  will  soon  again  be  possible 
for  the  American  bond  houses  to  bid  freely  for 
the  big  railway  loans  as  they  now  bid  for  legal 
municipals. 

104.  Railroad  Blanket  Refunding  Issues. 
Even  under  present  conditions  the  proper  pur- 
chase of  big  railroad  loans  by  the  retail  house 


64         BUYING  RAILROAD  BONDS 

implies  technical  qualifications  of  a  high  order 
in  the  bond  buyer.  Opportunities  (in  street 
trading  or  otherwise)  for  the  quick  purchase 
of  current  issues  at  advantageous  prices,  de- 
mand a  thorough  working  knowledge  of  all 
the  big  general  and  refunding  issues,  of  which 
there  are  about  forty — all  but  three  or  four 
of  which  are  listed — and  a  knowledge  of  two 
or  three  dozen  more  of  the  important  under- 
lying and  miscellaneous  loans. 

105.  The  preponderance  of  transactions  in 
the  refunding  issues  may  not  be  appreciated 
by  everybody.  Convertibility  (that  is,  market- 
ability and  hypothecary  value),  is  of  such 
tremendous  advantage  to  certain  types  of  in- 
vestors, particularly  institutions  like  national 
banks,  that  much  higher  prices  may  be  ob- 
tained for  issues  of  such  magnitude  and  vogue 
as  to  assure  a  future  fairly  steady  demand  at 
current  interest  rates.  Therefore,  on  the  in- 
sistence of  bankers,  the  railroads  for  the  past 
decade  have  been  satisfying  their  wants  for 
new  capital  less  and  less  by  means  of  new  first 
mortgage  divisional  issues,  or  the  like,  and 
more  and  more  by  new  long  term,  virtually 
"open  end"  blanket  mortgages  covering  the 
entire  property  and  of  sufficient  amount,  re- 
served in  escrow,  to  retire  at  or  before  matur- 
ity the  senior  and  miscellaneous  issues  of  the 
road. 


BUYING  RAILROAD  BONDS         65 

106.  The  provisions  of  these  blanket  refund- 
ing mortgages  are  becoming  standardized,  to 
the  great  benefit  of  railroad  finance.  By  grad- 
ual retirement  of  miscellaneous  mortgages 
and  issuance,  in  substitute,  of  escrow  refund- 
ing bonds,  not  only  is  the  tendency  of  railroad 
debt  to  become  simplified  and  easier  of  ap- 
praisal, but  to  become  more  negotiable,  as  the 
escrow  bonds  of  a  refunding  mortgage  take 
the  place  of  smaller  loans.  Hence  the  fact 
that  there  are  now  outstanding  over  $1,500,- 
000,000  of  these  refunding  bonds  and  forty  or 
more  issues  a  good  railroad  bond  buyer  should 
know  in  all  essentials  respecting  security  and 
price,  gives  us  some  notion  of  what  is  required 
of  the  buyer  of  the  big  issues.  If  a  buyer  has 
the  responsibility  of  shaping  up  for  the  accept- 
ance of  his  house  a  new  issue,  that  is  another 
matter.  Railroad  scholarship  then  is  only  a 
small  part  of  his  equipment.  Even  to  skirt 
about  his  problem  here  would  usurp  space. 
But  to  resume: 

107.  The  average  profit  in  "turning  over" 
these  current  issues  is  small — less  even  than 
in  handling  legal  municipals — therefore  a  nice 
sense  of  market  values  and  of  the  price  trend 
is  essential  to  success.  Some  of  the  best 
young  aggressive  houses  on  the  Street  have 
found  it  impossible  to  make  enough  money  in 
current  listed  railroad  issues  to  support  a  body 


66         BUYING  RAILROAD  BONDS 

of  bond  salesmen.  Ordinarily  selling  of  this 
sort  must  be  incidental  to  the  distribution  of 
other  more  profitable  securities.  Such  profit 
as  there  is  must  be  obtained  very  largely  by  a 
study  of  the  course  of  bond  prices  in  general 
and  of  the  range  of  movement  in  the  issue  in 
question.  It  is  easier  to  sell  than  to  buy  these 
bonds  right.  A  table  of  monthly  and  annual 
price  fluctuations  of  the  securities  (they  are 
listed,  remember)  is  an  excellent  index  of  rel- 
ative cheapness  and  dearness.  The  number 
of  sales  on  the  Exchange  and  the  volume  of 
sales  per  annum,  w^ill  also  have  significance. 

108.  One  must  not  gain  the  impression  from 
what  has  been  said  that  the  retail  bond  houses 
have  no  opportunity  for  direct  and  profitable 
relations  with  the  railroads.  The  bonds  they 
can  buy  and  sell  direct  are  usually  of  the  sec- 
ond class.  The  big  systems  have  subsidiaries 
which  from  time  to  time  must  put  their  name 
to  paper,  some  of  it  very  excellent  indeed. 
Let  us  remember  that  the  number  of  operating 
corporations  with  a  mileage  of  1,000  is  about 
50,  but  not  very  much  over  50;  that  there  are 
over  1,000  railways  reporting  to  the  Inter- 
state Commerce  Commission  that  have  a  mile- 
age of  under  250;  that  the  number  of  carriers 
of  the  switching  and  terminal  class  is  about 
500;  that  the  total  number  of  industrial  (as 
distinguished    from    commercial)    railways    is 


BUYING  RAILROAD  BONDS         67 

not  far  from  2,500,  exceeding  in  mileage  25,000. 
Although  not  all  these  transportation  agencies 
are  direct  obligors  and  emitting  funded  debt, 
nevertheless  the  sum  of  their  annual  output  of 
bond  issues  is  very  large,  and  their  debts  are 
well  v^rorth  the  solicitation  of  banking  houses 
that  are   equipped  to  handle  them. 

109.  Equipment  Bonds.  Perhaps  the  most 
satisfactory  form  of  railroad  loan  for  these 
houses  is  equipment  trust  obligations.  Inas- 
much as  the  average  life  of  the  average  issue 
is  5^  years  the  opportunities  to  profit  from 
the  reinvestment  of  funds  thus  placed  is  re- 
current. It  is  the  very  general  impression  that 
"not  a  dollar  of  money  invested  in  equipment 
bonds  has  ever  been  lost."  This  is  not  true. 
However,  I  have  examined  the  history  of  every 
equipment  issue  of  every  road  that  has  passed 
through  reorganization  or  receivership  since 
1872,  when  equipment  bonds  were  "invented," 
and  state  with  conviction  that  the  record  and 
the  present  legal  characteristics  of  the  stand- 
ard ten  year  serial  equipment  bond  (of  any 
of  the  three  current  types)  is  without  parallel 
as  respects  security,  except  first  mortgage  gas 
bonds  in  metropolitan  cities. 

110.  Equipment  issues  of  some  of  the  best 
systems  are  still  to  be  l)ought  direct  by  the 
bondhouse;  also  terminal,  divisional  and  mis- 
cellaneous issues.   All  classes  of  railroad  bonds 


68         BUYING  RAILROAD  BONDS 

of  the  smaller  roads  are  to  be  had.  The  vari- 
ous kinds  included  here  form  the  second  divi- 
sion of  railroad  bonds  corresponding,  in  some 
respects,  as  already  stated,  to  the  non-legal, 
or  general  market  municipals. 

111.  Railroad  Bond  Investment  Principles. 
The  investment  principles  governing  the  pur- 
chase of  the  big  refunding  and  of  the  miscel- 
laneous railroad  bonds  are  of  course  the  same. 
In  distinction  from  the  principles  of  municipal 
bond  investment,  they  are  thoroughly  estab- 
lished and  recognized.  Therefore  an  attempt 
to  detail  them  is  superfluous.  Still  a  few  com- 
ments of  a  general  nature  may  not  be  amiss. 

In  approaching  railroad  investment  study  the 
general  problems  will  be  found  to  be  definite 
in  number,  orderly  in  sequence,  and  now,  with 
the  jurisdiction  of  the  Interstate  Commerce 
Commission,  of  certain  application  at  least  to 
all  roads  that  do  an  interstate  business. 

112.  Proprietorship  and  Management.  The 
first  considerations,  of  Proprietorship  and 
Management,  are  not  the  less  important  be- 
cause irreducible  to  figures.  The  first  thought 
of  the  investigator  is,  or  should  be,  to  the  char- 
acter and  credit  of  the  dominant  proprietors. 
Financial  heredity,  in  this  matter,  counts  for 
more  than  most  people  realize.  In  Carl  Sny- 
der's excellent  book  on  American  Railways  as 
Investments,  1907,  he  has  this  to  say : 


BUYING  RAILROAD  BONDS         69 

"It  is  one  of  the  most  curious  facts  of  rail- 
way history,  but  one  exemplified  fully  enough, 
that  careful  and  conservative  conduct  of  a 
road  tends  in  some  sense  to  perpetuate  itself. 
....  It  is  not  for  nothing  that  the  Pennsyl- 
vania has  never  failed  to  pay  a  dividend  for 
more  than  fifty  years.  It  is  not  for  nothing 
that  roads  like  the  Reading,  the  Erie,  the 
Union  Pacific,  have  been  the  footballs  of  stock- 
jobbing speculators,  and  dishonest  directors. 
The  ownership  of  a  road,  the  personnel  of  its 
management,  may  change  absolutely,  yet  it  is 
curious  to  note  how  amid  all  these  changes 
its  character  for  good  or  evil  will  sometimes 
survive." 

It  is  a  matter  not  of  years  but  of  decades 
to  change  the  nature  of  a  railroad.  A 
knowledge  of  the  conduct  of  a  railroad  stock 
on  the  Exchange,  over  a  period  of  years,  and 
of  its  dividend  record,  its  history  in  receiver- 
ship, will  be  a  crude  but  reasonably  safe  guide 
to  the  general  health  of  the  road. 

113.  There  is  much  to  be  learned  from  the 
history  of  any  proprietorship  or  control.  The 
holders  of  the  underlying  bonds  of  one  of  the 
Western  systems  have  equities  in  earnings 
and  securities  that  make  the  obligations  appear 
of  a  very  high  type.  But  an  analysis  of  the 
methods  by  which  a  comparatively  small  out- 
lay of  money  obtained  control  of  this  property, 


70         BUYING  RAILROAD  BONDS 

by  means  of  a  system  of  holding  companies 
and  stock  pyramiding,  will  not  reassure  a  care- 
ful bond  buyer  that  his  interest  will  be  con- 
served. When  only  a  few  millions  of  cash 
were  necessary  to  control  a  property  bonded 
for  some  hundreds  of  millions,  the  market 
price  of  the  best  of  its  bonds  was  sure  to 
suffer  severely  when  it  appeared  that  the  sys- 
tem might  not  be  able  to  meet  all  of  its  obli- 
gations. 

114.  Where  there  is  a  truly  dominating  in- 
terest, such  as  Mofifat  in  the  Denver,  North- 
western, and  Pacific;  Flagler  in  the  Florida 
East  Coast;  Atkinson  in  the  Atlantic  and 
Birmingham ;  Stilwell  in  the  Kansas  City, 
Mexico  and  Orient,  or  Hill  in  the  Great  North- 
ern, the  inevitable  questions  are:  Is  this  a  cap- 
able railroad  man ;  is  he  constructive,  and  does 
he  conserve  minority  interests ;  who  are  his 
bankers;  in  what  other  roads  is  he  interested, 
and  what  other  connections  has  he?  The  same 
questions  hold  good  for  a  dominating  group 
of  men. 

115.  Community  of  Interest.  No  railroad 
development  of  the  past  ten  years  has  greater 
significance  to  bond  buyers  than  the  general 
recognition  of  the  necessity  for  that  entente 
cordiale  among  the  companies  which  arises 
from  a  "community  of  interest."  The  young- 
est  of   those   who   have   interest    in    financial 


BUYING  RAILROAD  BONDS         71 

matters  remembers  the  days  of  rate  wars  which 
drove  so  many  roads  into  bankruptcy.  When 
freight  tariffs  could  not  be  maintained  legally 
by  competing  carriers,  through  the  agency  of 
a  pool,  the  desired  result  was  obtained  by  the 
creation  and  recognition  of  a  community  of 
interest.  The  ownership  by  one  road  of  the 
stock  of  another,  with  consequent  dovetailing 
of  directorates,  led  to  amicable  understanding 
and  concert  in  action,  when  otherwise  there 
might  have  been  costly  warfare. 

116.  But  traffic  alliances  may  exist  without 
stock  control  by  any  party.  Then  the  visible 
evidence  of  co-operation  is  to  be  found  in  the 
duplication  of  officers  or  directors.  It  is  espe- 
cially important  that  the  smaller  independent 
roads  which  do  not  originate  sufficient  traffic 
to  make  them  self-sustaining  should  have  the 
benefit  of  friendly  connections  with  a  power- 
ful system  to  relieve  them  of  the  possibility  of 
destructive  competition.  In  thfe  case  of  an 
aggressive  independent  road  thia  possibility 
may  be  an  impending  probability.  There  are 
well  known  small  roads  that  today  have  great- 
er difficulty  in  maintaining  their  corporate 
independence  against  the  aggressions  of  larger 
.systems  than  they  do  in  maintaining^  the 
standard  of  their  service  or  the  sufficiency  of 
their  earnings.  The  recognition  of  the  com- 
munity of  railroad  interest  has  done  more  than 
anything  else,  except  the  general  development 


72         BUYING  RAILROAD  BONDS 

of  the  country  and  of  the  railroads  themselves, 
to  place  railroad  finance  upon  its  present 
stable  footing. 

117.  Management.  Management,  as  distin- 
guished from  proprietorship  and  control,  may 
be  looked  upon  as  relating  to  the  internal 
railroad  policies  governing  the  machinery  of 
transportation.  Subordinate  in  public  interest 
to  the  financial  heads  and  affiliations,  the  rail- 
road managers  and  their  work  will  be  best 
known  to  the  investigator  by  the  records  of 
physical  and  operating  efficiency. 

118.  Physical  Characteristics.  The  main 
physical  characteristics  to  be  subjected  to  the 
analytics  of  the  bond  buyer  are  the  location  of 
the  railroad,  the  size  or  mileage,  the  character 
and  condition  of  the  equipment,  and  the  oper- 
ating efficiency.  The  uses  to  which  informa- 
tion of  this  nature  may  be  put  will  readily 
suggest  themselves.  It  may  not  be  so  obvious, 
however,  that  a  reliable  source  for  this  infor- 
mation exists.  It  is  due  to  the  uniform  statis- 
tical requirements  of  the  Interstate  Commerce 
Commission  that  reliable  data  of  this  nature 
is  available.  Unfortunately  their  supervision 
does  not  extend  back  over  a  sufficient  number 
of  years  to  validate  much  historical  compari- 
son. 

119.  Earning  Power  and  Capitalization. 
Besides  the  personnel  and  the  physical  charac- 


BUYING  RAILROAD  BONDS         73 

teristics,  the  studies  of  the  railroad  bond  buyer 
will  cover  the  company's  earning  power  and 
the  valuation  and  capitalization  to  which  it  is 
related.  In  these  subjects  also  he  is  indebted 
to  the  Commission  for  thoroughly  reliable  and 
thoroughly  detailed  figures  such  as  ordinarily 
may  not  be  obtained  regarding  any  other  class 
of  private  corporations,  and  only  with  the 
greatest  difficulty  from  municipal  corporations. 
Earning  power,  or  more  broadly  and  techni- 
cally the  Income  Account,  and  valuation,  or 
the  Capital  Account,  are  elaborately  and  logic- 
ally dissected  by  the  Commission  in  such 
manner  that  no  competent  bond  buyer  can  fail 
to  comprehend  the  true  financial  condition  of 
the  obligor. 

120.  Publicity  makes  possible  to  any  investor 
who  is  capable  of  it  the  same  sort  of  statistical 
investigation  that  any  banking  house  ought 
to  give  a  railroad  security  it  buys  or  recom- 
mends. But  in  want  of  ability,  inclination  or 
opportunity  to  study,  the  investor  may  accept 
the  dictum  of  his  bankers  on  railroad  bonds, 
if  ever,  for  a  house  that  cannot  give  a  compe- 
tent opinion  on  an  American  railroad  bond  is 
not  qualified  to  advise  on  any  type  of  security. 
Not  that  such  judgments  are  easily  arrived  at, 
but  that  the  investment  principles  are  of  com- 
mon acceptance  and  the  material  facts  indis- 
putable. 


CHAPTER  V. 
BUYING  CORPORATION  BONDS. 

121.  Students  can  buy  municipal  or  railroad 
bonds,  but  it  takes  business  men  to  buy  cor- 
poration bonds.  In  other  words,  we  have  now 
come  to  that  point  in  the  bond  business  where 
mere  theory  (with  no  reproach  in  the  term) 
must  be  subordinated  to  special  experience 
and  native  endowment  to  perform  the  purchas- 
ing function  without  inviting  regrets.  There 
is  more  here,  also,  of  the  spirit  of  the  market 
place  where  Greek  meets  Greek  in  trade,  and 
the  firm  with  the  shrewdest  instinct  for  barter 
stands  the  best  chance  of  success.  Less  capi- 
tal is  needed  for  corporation  bond  buying,  for 
the  average  issue  is  smaller;  therefore  the  field 
is  open  to  a  wider  range  of  talent  and  a  display 
of  greater  individual  ingenuity  in  financing. 
But  before  considering  the  problems  of  this 
kind  of  buying  we  must  come  to  some  conclu- 
sion as  to  what  are  corporation  bonds. 

122.  What  Corporation  Bonds  Are.  One 
who  is  at  all  sensitive  to  nice  distinctions  in 
terminology  will  object  to  a  division  of  funded 
debt  that  excludes  railroad  loans  from  the  class 
'called  corporation  bonds.  If  railroad  bonds 
are  not  corporation  bonds  none  are.  On  the 
other  hand,  if  one  is  going  to  be  academic, 

74 


BUYING  CORPORATION   BONDS   75 

cities  and  towns  and  some  other  municipalities 
are  corporations  —  public  corporations  —  and 
their  bonds  must  therefore  be  corporation 
bonds, 

123.  Classification  of  Bonds.  To  show  the 
difficulty  of  establishing  a  good  nomenclature 
I  give  on  the  following  page  a  rough  classifica- 
tion of  bonded  debt  according  to  the  character 
of  the  issuer,  or  obligor.* 

From  this  classification  it  will  be  seen  there 
is  no  word  or  phrase,  now  current,  that  is 
properly  descriptive  of  the  transportation, 
public  utility,  industrial  and  miscellaneous  is- 
sues that  are  not  civil  loans  and  are  not  rail- 
road loans.  Moreover,  it  will  probably  tax  the 
ingenuity  of  any  one  to  discover  or  coin  such 
a  word  or  phrase.  Even  as  this  classification 
stands,  many  will  object  to  the  separation  of 
street  railway  and  interurban  railway  securi- 
ties and  will  wish  to  associate  irrigation  dis- 
trict bonds  with  municipals  or  quasi-muni- 
cipals. 

124.  In  want  of  logic  a  safe  guide  is  custom, 
and  custom  loosely  speaks  of  government, 
municipal,  railroad,  and  corporation  bonds, 
meaning  by  the  last  phrase,  in  a  very  general 
way,    the    issues    that    are    classified    in    this 


•  There  are  three  other  logical  anil  comprehensive  classifica- 
tions: according  to  the  security  for  the  hoiuis,  according  to  the 
purpose  or  function  of  this  issue,  and  according  to  conditions 
attending  payment  of   interest  and  principal. 


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BUYING  CORPORATION  BONDS   77 

scheme  below  railroad  bonds.  Hence  the  cap- 
tion of  this  article,  although  it  contradicts  the 
very  classification  in  question. 

125.  Nothing-  more  than  a  glance  at  the  clas- 
sification is  necessary  to  establish  in  any  one's 
mind  the  fact  that  the  professional  bond  buyer 
faces  more  difficult  and  varied  problems  in  this 
type  than  in  any  of  the  security  types  we  have 
dealt  with  previously.  It  will  be  conceded 
at  sight  that  in  corporation  bonds  security  is 
first,  last,  and  always  the  prime  consideration. 
Literally,  on  the  fingers  of  two  hands  may  be 
counted  the  bonds  of  which  the  security  may 
be  taken  for  granted,  relatively  speaking,  and 
attention  be  devoted  to  the  intensity  of  the 
investment  demand  and  future  advantages 
from  the  fiscal  relationship. 

126.  Corporation  Bond  Investment  Prin- 
ciples. If  security  is  the  main  problem  and  so 
many  very  unlike  species  come  under  the  ge- 
nus corporation  bonds,  it  is  correspondingly 
difficult  to  sum  up  the  investment  principles 
governing  their  purchase.  This  much  may  be 
said  at  the  outset :  to  buy  intelligently  any 
type  of  corporation  bond  one  must  know  the 
kind  of  business  the  corporation  is  engaged  in. 

127.  Knowing  the  Business  of  the  Corpora- 
tion. If  a  house  is  c(jnsidering  the  bonds  of 
an  independent  telephone  company  in  Kansas 
or  Nebraska,  it  is  not  sufficient  to  analyze  with 


78     BUYING  CORPORATION  BONDS 

the  utmost  care  the  credit  and  earning  power 
of  this  company,  and  the  general  physical  effi- 
ciency of  its  plant ;  it  is  necessary  to  study  the 
character  of  Western  telephony  as  related  to 
Western  social  conditions,  and  the  place  of 
this  company's  particular  kind  of  service  in  the 
scheme  of  telephonic  communication  the 
country  over;  it  is  necessary  to  come  to  some 
conclusion  as  to  the  likelihood  of  later  cordial 
affiliation  with  some  large  system  with  long- 
distance, interstate  activities ;  it  is  necessary 
to  understand  the  policy  of  the  Bell  system 
and  the  Bell  attitude  toward  independents  in 
general.  In  a  word,  one  must  learn  the  tele- 
phone business. 

128.  Water  Companies.  It  is  surprising  how 
much  material  for  thoroughly  practical  indi- 
vidualistic study  is  offered  in  any  of  the  fields 
of  commercial  endeavor  covered  by  the  obli- 
gations that  have  been  classified.  Water  com- 
panies, perhaps,  operate  under  conditions  that 
approximate  simplicity  and  uniformity  more 
closely  than  most  other  obligors  of  corporation 
bonds.  Yet  the  amount  of  labor  that  certain 
bond  houses  have  put  into  purely  statistical 
study  of  these  companies  is  incredible.  Have 
you,  for  instance,  any  notion  as  to  whether 
there  is  a  known  relation  between  the  per 
capita  debt  of  these  companies  and  the  size 
of  the  community  served?     Or  what  propor- 


BUYING  CORPORATION   BONDS   79 

tion  of  gross  earnings  is  properly  applicable 
for  maintenance  and  renewals  in  this  as  com- 
pared with  other  public  utility  corporations? 
129.  Gas  Companies.  The  operation  of  gas 
companies  also  seems  fairly  simple;  that  is, 
so  far  as  manufacturing  and  distribution  prob- 
lems have  any  direct  relation  to  investment 
in  gas  bonds.  Yet  we  must  consider,  must  we 
not,  what  danger  manufacturing  plants  run  of 
being  supplanted  by  the  discovery  of  new 
sources  of  natural  gas,  which  can  be  piped  a 
great  distance?  We  must  know  whether  elec- 
tricity threatens  to  overthrow  gas  as  an  illu- 
minant,  as  gas  to  a  large  extent  took  the  place 
of  oil,  and  oil  of  candles.  To  know  this  we 
must  follow  the  history  of  improvements  in 
gas  and  electric  lighting  to  Welsbach  and  tung- 
sten incandescence.  If  gas  is  being  supplanted 
to  any  appreciable  degree  we  must  appraise 
the  other  outlets  for  its  consumption,  as  heat 
and  power.  Then  there  is  the  danger  of  reduc- 
tion in  rates.  As  rates  have  been  reduced  in 
the  past,  have  earnings  decreased  or  has 
growth  in  per  capita  use  and  in  population, 
and  has  the  utilization  or  residuals  offset  the 
decline  in  price?  Is  there  any  relation  be- 
tween equitable  rates  and  the  population 
served?  To  know  gas  bonds,  then,  one  must 
know  something  more  than  the  mere  outlines 
of  the  gas  business. 


80     BUYING  CORPORATION  BONDS 

130.  Perhaps  it  is  more  evident  now  than  in 
the  earlier  papers  of  this  series  what  estimable 
service  may  be  rendered  a  banking  house  by  a 
competent  statistical  force  in  gathering  ma- 
terial which  shall  be  the  basis  of  sound  busi- 
ness judgments.  Unfortunately,  but  quite 
naturally,  most  material  that  is  gathered  in 
this  way  never  appears  in  print.  It  is  personal 
or  firm  property  and  is  too  valuable  to  be 
given  away. 

131.  Street  Railways.  A  representative  of 
one  of  the  big  down-town  banks  came  to  me 
recently  to  be  directed  to  a  trustworthy  source 
of  printed  information  concerning  street  rail- 
ways, by  means  of  which  to  learn  the  essen- 
tials of  security  in  street  railway  stocks  and 
bonds.  I  gave  him  what  platitudes  I  had 
written  on  the  subject  and  all  the  others  I 
knew  about,  but  told  him  his  quest  was  hope- 
less ;  he  would  have  to  learn  street  railroading 
to  be  sure  of  his  ground.  What  he  wanted  was 
not  for  publication. 

132.  The  Income  of  Public  Service  Corpora- 
tions. Public  institutions  can  afford  to  be  less 
niggardly  of  their  data.  An  earnest  of  what 
may  be  done  in  a  statistical  way  that  is  of 
immense  practical  value  to  banking  houses 
and  investors  is  furnished  by  the  Tuck  School 
of  Finance,  Dartmouth  College.  Prof.  W.  H. 
Lyon   is  setting  several   of  the  Tuck  School 


BUYING  CORPORATION   BONDS   81 

men  at  work  on  theses  that  are  designed  to 
show  the  effect  of  changing  commercial  and 
financial  conditions  on  the  earning  power  of 
various  industries.  Something  distinctive  and 
valuable  will  be  gained,  when  we  know  what 
effect  a  short  panic  or  a  longer  commercial 
depression  has  on  the  gross  and  net  income  of 
all  the  leading  types  of  public  service  corpor- 
ations. 

133.  The  point  of  all  this,  so  far  as  it  con- 
cerns the  public,  is  to  know  what  houses  do 
and  what  houses  do  not  identify  with  them- 
selves engineers  and  other  specialists  compe- 
tent to  pass  upon  the  technical  problems  that 
each  class  of  bonds  gives  rise  to.  But  the 
public  doesn't  know  and  cannot  know.  All 
the  public  can  do  is  to  patronize  the  houses 
that  among  the  fraternity  have  the  reputation 
for  technical  competence.  Is  it  strange  that 
as  a  rule  the  same  houses  that  are  considered 
technically  competent  have  a  reputation  for 
conservatism — much  abused  word?  Banking 
houses,  like  servants,  have  "characters,"  and 
there  isn't  much  disagreement  in  the  profession 
as  to  which  are  good,  which  bad,  and  which 
indifferent. 

134.  Bond  Houses  as  Specialists.  Some 
houses  make  a  specialty  of  one  type  of  bond: 
Electric  light  and  power,  water,  real  estate,  or 
it  may  be  irrigation.     In  this  case  it  is  quite 


82     BUYING  CORPORATION  BONDS 

probable  that  they  are  reconstructors,  opera- 
tors, and  managers  in  their  specialty,  and 
therefore  competent  appraisers  of  property 
values.  Per  contra,  the  presumption  is  that 
because  of  their  very  specialization  they  may 
be  weak  in  banking  experience,  and  in  the 
many  excellent  business  qualities  that  charac- 
terize the  better  American  bond  house.  Yet 
all  bond  men  w^ill  recall  one  or  two  notable  ex- 
ceptions to  both  rules. 

135.  The  Newness  of  Corporation  Bonds. 
The  most  eminent  characteristic  of  corpora- 
tion bond  dealings  is  the  newness  of  them. 
Take  up  a  copy  of  "Poor's  Industrial  Manual" 
and  open  at  random.  The  chances  are  that  five 
times  running  your  eye  will  light  on  bond  is- 
sues dated  within  ten  years — even  apart  from 
refunding  loans.  This  newness,  rather  than  in- 
sufficient earning  power,  is  the  source  of  much 
public  aloofness  from  corporation  loans.  There 
is  basis  for  the  feeling.  Water  supply  is  im- 
memorial ;  the  gas  business  nearly  a  century 
old ;  but  street  and  interurban  railroading, 
electric  lighting,  hydro-electric  service,  tele- 
phony and  irrigation  have  not  attained  their 
majority.  Furthermore,  although  the  steam- 
ship business  is  of  long  standing,  and  the  lum- 
ber business  and  real  estate  operations  are 
antediluvian  in  origin,  the  principles  of  bond 
investment   have   been    commonly   applied   to 


BUYING  CORPORATION   BONDS   83 

them  only  very  recently.  It  takes  years  to 
establish  speculative  and  investment  principles 
on  a  basis  of  experience  that  will  warrant  the 
invitation  of  cautious,  responsible  funds. 

136.  Time  will  remedy  youthfulness;  and 
in  any  case  youthfulness  is  not  quite  the  car- 
dinal difficulty,  but  inexperience.  Types  of 
business  service  that  are  common  to  all  com- 
munities, particularly  perhaps  to  Eastern  com- 
munities and  to  cities,  generally  attain  their 
experience  most  rapidly.  They  become  "stand- 
ardized." Kinds  of  service  that  are  univer- 
sally required  in  settled  communities — water, 
light,  power,  and  communication — are  most 
rapidly  attaining  fiscal  maturity.  Therefore 
public  utility  bonds  have  until  very  recently 
held  a  rank  in  common  esteem  midway  be- 
tween railroad  and  the  "industrial  and  mis- 
cellaneous" loans. 

137.  Industrial  Issues.  One  of  the  big  ques- 
tions that  the  buyer  for  the  bond  house  must 
decide  is  whether  his  firm  shall  lend  its  name 
to  any  industrial  issues.  It  is  a  question  of 
policy  rather  than  of  relative  security.  The 
public  utility  field,  intrinsically,  is  safer  be- 
cause earnings  are  more  definitely  predicable. 
But  the  competition  for  good  public  utility 
bonds  is  so  keen,  and  for  good  industrials  so 
slight,  that  it  is  easier  to  find  loans  of  the  latter 
type  that  have  the  necessary  intrinsic  merit. 


84     BUYING  CORPORATION  BONDS 

138.  The  Competition  for  Public  Utility 
Bonds.  I  say  the  competition  for  public  utili- 
ties, i.  e.,  public  service  corporation  bonds,  is 
keen.  In  the  first  chapter  I  said  that  the  com- 
petition among  promoters  to  obtain  place- 
ment for  their  loans  was  keen.  The  two 
statements  are  not  contradictory.  So  far  as 
offerings  by  promoters  are  concerned,  they  are 
innumerable.  Many  of  them  have  merit.  But 
the  bond  buyer  has  not  only  merit  to  consider 
but  the  policy  of  the  firm  and  the  character  of 
the  firm's  clientele.  To  get  a  loan  that  is  both 
good  in  itself  and  suitable  to  the  nature  of  the 
demand — that  is  the  difficulty.  Many  proposi- 
tions are  offered,  but  few  are  chosen.  Hence 
a  bond  house  that  will  handle  corporation  loans 
cannot  reach  any  great  distributive  power 
without  maintaining  at  least  one  competent 
investigator  or  buyer  on  the  road.  Sometimes 
this  man  is  an  engineer.  At  others  he  is  a 
member  of  the  firm.  In  either  case  the  judg- 
ment of  the  man  in  the  field  looking  for  pos- 
sible corporations  and  loans  will  be  supple- 
mented by  others  with  different  qualifications: 
those  who  look  at  the  purchase  from  a  different 
angle. 

139.  In  the  engineer's  mind  will  be  empha- 
sized the  value  of  the  physical  properties,  the 
strategy  of  their  location,  and  the  future  dura- 
tion   of    their    serviceableness    pitted    against 


BUYING  CORPORATION   BONDS   85 

wear  and  tear,  improvements  and  new  inven- 
tions. The  auditor  will  seek  to  read  from  the 
company's  books  an  immaterial  expression  of 
the  company's  character,  the  truth  concerning 
its  earning  power,  and  the  uses  to  which  the 
earnings  have  been  put.  The  statistical  expert 
will  interpret  the  report  of  engineer  and  audi- 
tor in  terms  with  investment  meanings.  The 
sales  manager  will  consider  the  attractiveness 
of  the  security  thus  interpreted  to  the  kind  of 
investment  demand  the  hrm  is  prepared  to 
satisfy.  The  bankers  themselves,  fully  ap- 
prised by  these  specialists  of  the  various 
qualities  of  the  proposed  issue,  will  determine 
the  feasibility  of  "carrying"  the  securities 
under  the  present  condition  of  the  firm's  credit 
at  the  banks,  and  the  condition  of  credit  in 
general. 

140.  The  Preference  for  Public  Utilities. 
The  feeling  against  industrial  loans  is  not  so 
strong  as  it  was  five  years  ago,  or  three  years 
ago.  There  are  several  reasons.  The  growth 
of  the  scientific  spirit  in  business  increases 
the  stability  of  the  large  industrial  corporations 
that  seek  to  emit  funded  debt  through  banking 
channels.  The  decreased  purchasing  power  of 
money  stimulates  interest  in  loans  of  higher 
yield  than  offered  by  public  service  bonds. 
The  very  difficulty  of  tlic  public  service  pur- 
chase problem  and  the  greater  profits  in  indus- 


86     BUYING  CORPORATION  BONDS 

trial  flotations,  influence  the  bond  houses  to 
attempt  to  widen  the  legitimate  investment 
interest  of  their  patrons  by  a  campaign  of 
education  regarding  what  is  essential  and  what 
is  desirable  in  investments. 

141.  If  any  readers  of  this  book  are  skeptical 
regarding  the  reputed  profits  of  municipal  and 
railroad  bond  selling,  it  must  be  because  they 
do  not  believe  business  can  be  successfully  con- 
ducted on  such  narrow  margins  as  these  pages 
have  declared.  They  overlook  two  things :  the 
self-supporting  nature  of  the  goods  dealt  in, 
and  the  consequent  immense  volume  of  busi- 
ness done  per  unit  of  capital.  Incredulity  is 
misplaced.  If  there  has  been  any  error  it  has 
been  in  overstating,  not  understating  the 
profits. 

142.  The  Profit  in  Corporation  Bonds.  But 
when  we  come  to  corporation  bonds  it  is 
another  story.  The  gross  profit  in  corporation 
bond  selling  is  very  substantial.  It  will  run 
from  5  to  15  per  cent;  and  if  the  loans  are 
wisely  chosen  this  will  be  only  a  part  of  the 
ultimate  profit,  for  it  is  indeed  a  fairly  easily 
sold  loan  that  will  be  bought  without  a  sub- 
stantial bonus  of  stock  that  eventually  should 
pay  handsome  dividends. 

143.  There  is  no  need  of  concealment  or 
apology  for  these  profits.  There  is  no  material 
here  for  the  over-acute  critic  with  senses  whet- 


BUYING  CORPORATION   BONDS   87 

ted   for   evil   in   anything   that   comes   out   of 
Wall  Street. 

144.  No  firm  or  group  of  firms  has  a  mono- 
poly of  the  corporation  bond  business.  The 
market  for  the  loans  is  perfectly  free.  The 
capital  requirements  of  few  companies  in  the 
country  are  too  heavy  for  satisfaction  by  any 
one  of  many  banking  houses.  In  so  far  at  least 
as  public  service  corporations  are  concerned, 
the  offerings  of  thoroughly  meritorious  issues 
are  not  so  numerous  that  any  have  to  go  beg' 
ging  from  saturation  of  the  investment  mar- 
kets. Therefore  the  price  of,  or  profits  from, 
handling  corporation  loans  is  adjusted  to  the 
cost  of  distribution. 

145.  Costly  Distribution.  If  there  is  any 
good  basis  at  all  for  criticism  of  the  gross 
profit  in  distribution — and  maybe  there  is — • 
it  lies  not  in  the  residual  profits  that  remain 
with  the  retail  bond  houses,  but  in  the  unscien- 
tific, costly  method  of  distribution.  Let  me 
repeat  an  important  statement  made  previous- 
ly: the  science  of  bond  buying  has  developed 
more  rapidly  than  the  science  of  bond  selling, 
or  distribution.  The  cost  of  distribution,  and 
possible  remedies,  belong  more  properly  to 
another  chapter.  If  this  undue  cost  could  be 
ascertained  and  subtracted  from  the  gross 
profit  the  resulting  net  would  appear  not  more 
than  a  fair  reward  for  the  fiscal  service  ren- 
dered. 


88     BUYING  CORPORATION  BONDS 

146.  Construction  Propositions.  Properties 
that  are  in  the  construction  stage  do  not  meet 
with  banking  favor.  They  are  speculations 
pure  and  simple,  and  properly  require  specula- 
tive financing,  w^ith  v^hich  the  bond  houses  in 
their  proper  functions  have  nothing  to  do. 

147.  Demonstrated  plant  value  and  demon- 
strated earning  power  are  pre-requisites  of  an 
investment  interest.  When  a  company  doing 
a  kind  of  business  that  the  public  knows  some- 
thing about  has  this  value  and  earning  power 
but  needs  to  enlarge  its  facilities  more  rapidly 
than  it  can  pay  for  out  of  surplus  income,  its 
natural  recourse  is  the  bond  house.  In  this 
case  the  service  of  the  house  is  principally,  if 
not  solely,  fiscal,  and  its  compensation  for 
financing  the  needed  enlargements  may  come 
largely,  if  not  wholly,  from  the  bond  selling 
profits. 

148.  This  country  is  developing  too  rapidly, 
however,  for  normal  business  growth  by  accre- 
tion alone.  Small  enterprises  are  forced  into 
large  or  driven  to  the  wall.  Industries  here, 
there,  and  everywhere  engulf  or  are  engulfed. 
Distances  and  time  are  disregarded  in  the 
struggle  for  control. 

149.  The  Bond  Houses  as  Reorganizers. 
The  bond  houses,  therefore,  are  receiving  more 
and  more  frequent  appeals  to  finance  plans  of 
amalgamation  and  reorganization.    This  fiscal 


BUYING  CORPORATION   BONDS   89 

service  is  more  speculative  than  the  former, 
and  requires  for  satisfactory  results  a  higher 
degree  of  administrative  capacity.  Henceforth 
no  house  may  expect  to  become  identified  in  a 
large  way  with  corporation  finance  that  is  not 
equipped  to  direct  in  part  the  policies  of  the 
companies  it  assists.  As  time  goes  on  the  line 
of  separation  will  disappear  between  the  engi- 
neering corporations  with  banking  subsidiaries 
having  security  outlets  and  the  banking  houses 
with  engineering  and  operating  departments. 

150  In  line  with  this  thought  there  is  no 
reason  why  a  firm  that  adheres  most  scrupu- 
lously to  investment  ideals  should  not  promote 
and  support  through  the  construction  stage 
any  enterprise  the  firm  is  technically  qualified 
to  further,  provided  it  does  not  put  out  securi- 
ties to  the  public  until  they  are  ripe.  It  will 
be  seen,  however,  that  to  the  extent  firms  pur- 
sue this  policy  they  are  disqualifying  them- 
selves, as  firms,  from  developing  the  purely 
banking  function ;  and  the  banking  function  is 
more  closely  kin  to  their  main  business — the 
selling  of  investment  bonds. 

151.  Although  this  mutual  attraction  of  the 
banking  and  operating  elements  of  modern 
industry  may  cause  misgivings  on  the  part  of 
those  purists  who,  if  they  could,  would  insist 
at  all  costs  on  the  distinction  between  invest- 
ment  aloofness   and    speculative   participation 


90     BUYING  CORPORATION  BONDS 

in  active  affairs,  nevertheless  it  may  prove  the 
best  thing  that  could  happen  to  business  gener- 
ally. A  smaller  percentage  of  bond  houses, 
perhaps,  may  close  a  quarter  century  of  honor- 
able business  without  loss  to  any  client,  but  a 
larger  percentage  of  those  who  entrust  their 
funds  to  corporate  enterprise  may  receive  com- 
mensurate returns. 


CHAPTER  VI. 
THE  ADVISORY  FUNCTION. 

152.  Advising  a  Woman.  I  was  once  as- 
sociated with  "the  buying  side"  of  a  banking 
house  that  is  widely  known  for  the  upright- 
ness of  its  dealings  with  clients.  A  lady  un- 
known to  us  came  into  the  office  one  day  bent 
on  buying  a  certain  listed  industrial  preferred 
stock,  but  reluctant  to  do  so  without  first  talk- 
ing the  matter  over.  In  the  absence  of  the 
sales  manager  I  discussed  with  her  the  merits 
of  this  stock,  but  advised  her  to  purchase,  in 
preference,  the  best  unlisted  public  utility  bond 
we  then  had  to  ofifer.  The  income  from  these 
two  investments  was  practically  the  same — 
something  over  five  per  cent.,  but  the  security 
for  the  bond  would  be  considered  by  most 
people  superior.  At  least  the  marketable  value 
would  be  more  stable,  and  also  the  periodicity 
and  amount  of  the  income,  presumably. 
Furthermore  (without  meaning  to  reflect  on 
the  highly  valuable  services  of  the  stock  ex- 
changes) it  is  my  experience  that  the  evil 
genius  of  widely  posted  quotations  has  even 
a  mrjre  baneful  effect  on  women  than  on  men. 

153.  At  this  point  in  the  interview  the  sales 
manager  appeared,  and  after  explanations  all 
round  asked  me  in  the  presence  of  the  pros- 

91 


92        THE  ADVISORY  FUNCTION 

pective  customer  if  I  didn't  thinP  a  certain 
underlying  divisional  railroad  issue  more  suit- 
able for  her.  To  be  sure.  But  I  knew  that 
it  would  be  impossible  to  sell  her  any  of  these, 
quite  irrespective  of  the  fact  that  there  was  no 
profit  in  them  to  speak  of,  for  a  scant  4  per 
cent,  has  no  attractions  to  people  who  look 
takingly  at  high-yield  industrial  preferred 
stocks. 

So  we — or  rather  the  manager — did  as  one 
would  like  to  be  done  by,  hewed  square  to  the 
line,  stated  unwelcome  investment  truths,  gave 
entirely  disinterested  advice,  and  the  lady  went 
elsewhere  to  make  her  purchase,  whatever  it 
may  have  been,  evidently  deficient  in  acquaint- 
snce  with  human  nature  as  well  as  with  invest- 
ments. 

154.  The  Ethics  of  Salesmanship.  It  would 
be  idle  to  affirm  that  an  incident  like  this  il- 
lustrates the  general  temper  of  bond  salesman- 
ship. The  millennium  has  not  yet  come  to  the 
security  houses,  nor  have  many  of  them  more 
than  bowing  acquaintance  with  the  golden 
rule.  They  are  not  in  business  to  save  a  client 
in  spite  of  himself  or  herself.  But  the  most 
successful  bond  salesman  I  know  is  un- 
equivocally honest  in  the  advice  he  gives  his 
customers,  and  of  the  many  salesmen  who 
have  worked  with  me  and  under  me  I  have 
never  known   one   who   I   believe   would   de- 


THE  ADVISORY  FUNCTION        93 

liberately  play  upon  the  business  ignorance  of 
tvomen  or  other  dependent  persons. 

155.  Perhaps  the  close  of  the  preceding 
ocntence  looks  like  an  anti-climax;  but  is  it? 
In  how  many  lines  of  business  is  there  a  dis- 
tinct, recognized  ethical  code  that  transcends 
the  law  and  even  the  broader  consideration  of 
business  expediency?  One  looks  to  some  of 
the  professions,  like  medicine,  to  find  an 
analogy.  This  thought  leads  to  another  that 
I  like  to  emphasize  as  frequently  as  may  be. 
When  the  bond  business  is  conducted  as  ef- 
ficiently as  possible  from  the  standpoint  of  the 
investor,  when  the  advisory  function  is  de- 
veloped to  its  proper  proportions,  the  bond 
business  has  become  a  profession.  To  the  ex- 
tent that  now  a  bond  house  or  its  traveling 
representatives  can  be  consulted  as  a  man  con- 
sults his  physician  or  his  attorney,  relying  not 
altogether  on  the  personal  integrity  of  his  con- 
sultee  (to  coin  a  word),  but  also  on  the  recog- 
nized code  of  ethics  in  the  fraternity — to  that 
extent  the  bond  business  has  become  a  pro- 
fession entitled  to  the  respect  and  confidence 
we  have  for  and  in  professional  men  who  value 
service  above  compensation. 

156.  Financial  Jackals.  Would  that  it  were 
not  necessary,  in  fidelity  to  truth,  to  note  ex- 
ceptions. Nevertheless,  I  can  now  recall  only 
one    New    York    bond    house,    and    only    one 


94        THE  ADVISORY  FUNCTION     - 

Boston  house,  that  I  have  reason  to  believe, 
from  occasional  contact,  to  be  virtually  want- 
ing in  ordinary  business  integrity.  There  may 
well  be  others,  for  my  experience  is  limited. 
However,  is  this  testimony  not  a  little  out  of 
the  ordinary? 

157.  The  time  was  when  so  much  could 
not  be  said  for  the  security  bankers.  Not 
very  many  years  ago  there  was  a  house  of 
almost  national  reputation  that,  taken  out  of 
the  hands  of  its  founder  but  carried  on  in  his 
name,  laid  waste  many  a  fortune.  The 
plundering  was  open  and  shameless.  The 
piratical  character  of  the  salesmanship  was 
even  the  subject  of  jest  in  doggerel  verse,  cir- 
culated from  the  home  office  among  the  em- 
ployees. 

158.  I  remember  calling  in  those  times  on 
a  lady  who  was  among  the  prominent  bond- 
buyers  of  Salem.  One  day  she  excused  her- 
self from  doing  business  with  me  on  the 
ground  that  she  had  just  sold  to  a  salesman 
of  this  house  an  old,  seasoned,  underlying  rail- 
road 5  per  cent,  bond  at  par,  in  exchange  for 
the  bond  (sold  at  a  discount)  of  a  railroad  in 
New  Mexico,  on  which  I  knew  the  ties  were 
never  laid.  She  was  felicitating  herself  on 
this  exchange  because  her  old  bond,  when  due, 
would  be  worth  only  par,  the  salesman  said, 
and  he  very  generously  ofifered  to  pay  her  the 


THE  ADVISORY  FUNCTION        95 

amount  now,  in  advance  of  maturity,  and  not 
only  that,  but  he  was  to  sell  her  another  5  per 
cent,  railroad  bond,  a  first  mortgage  railroad 
bond,  too,  for  which  she  would  have  to  pay 
only  $950.     So  she  was  to  gain  $50. 

159.  That  is  the  sad  side  of  bond  selling. 
I  tried  very  hard  in  the  days  of  my  apprentice- 
ship to  do  business  with  the  widow  of  a  Boston 
physician.  Her  husband  had  left  her  a  modest 
house  with  its  furnishings,  and  $20,000  of  life 
insurance.  The  life  insurance  she  could  have 
lived  on  very  nicely  in  well-chosen,  well- 
scattered  5  per  cent,  bonds.  The  money  finally 
went  into  9  per  cent.  California  oil  bonds.  She 
liked  my  appearance,  she  said,  and  would  like 
to  do  business  with  me.  But  why  should  she 
buy  5  per  cent,  bonds  when  she  could  buy  9 
per  cent,  bonds  at  the  same  price?  May  that 
oil  company  prosper!  In  this  case  no  bond 
house  was  to  blame. 

160.  Naturally,  the  damage  done  legitimate 
bond  selling  by  financial  jackals  is  very  great. 
Every  sales  manager,  even  of  the  most  favor- 
ably known  houses,  realizes  how  much  busi- 
ness is  lost  because  of  them.  Let  a  bond  man 
leave  the  beaten  paths  for  a  day,  even  in  such 
a  "well-combed"  State  as  Connecticut,  and  he 
will  be  liable  to  a  greeting  that  should  have 
been  given  his  more  successful  swindling 
predecessor,  who  called  with  worthless  stock 


96        THE  ADVISORY  FUNCTION 

for  sale.  How  few,  relatively  speaking,  are 
the  places  whence  he  will  be  turned  away  be- 
cause of  regretted  visitations  from  his  com- 
petitors in  the  bond  business  ! 

161.  Ethically,  the  advice  of  the  bond 
houses  is  excellent,  whether  coming  direct 
from  the  ofifice  or  through  salesmen.  Tech- 
nically, its  value  is  highly  variable  in  this 
country,  due  to  the  fact  that  our  financial 
houses  are  still,  primarily,  merchants  of  se- 
curities rather  than  counselors.  It  is  hard  to 
be  fair  as  between  two  securities  carrying 
very  unequal  profits.  That  is  one  reason  why, 
in  the  previous  chapter  I  intimated  that  the 
merging  of  banking  and  operating  functions 
in  a  bond  house  has  its  drawbacks.  It  im- 
pairs the  value  of  the  advisory  function. 

162.  As  merchants,  rather  than  counselors, 
the  major  efifort  is  still  to  "move  the  goods," 
and,  as  I  have  stated  in  the  introduction  to 
"The  Principles  of  Bond  Investment,"  the 
salesman  goes  upon  the  road  trained  in  ad- 
dress, primed  with  the  latest  gossip  of  new 
ore-bodies  and  melon-cutting,  and  with  the 
talking  points  of  his  leading  bonds — the  bonds 
he  wants  the  most  to  sell, — really  sincere  and 
frank  in  interpreting  the  information  on  his 
circulars,  but  for  the  most  part  inconsiderate 
of  the  wants  of  his  clients,  quite  unable  to 
comprehend   or   explain   the   essential    invest- 


THE  ADVISORY  FUNCTION        97 

ment  qualities  in  the  bonds  he  offers — unable, 
for  instance,  to  tell  whether  there  is  a  differ- 
ence between  a  bond  and  a  note,  or  between  a 
car-trust  certificate  and  an  equipment  bond. 
Salesmanship,  so  represented,  is  not  a  profes- 
sion but  a  trade.  It  will  be  surprising  if  a 
decade  does  not  improve  this  condition  of 
things.  Business,  in  self-interest,  is  becoming 
reconciled  to  scientific  management.  Some 
day,  in  self-interest,  it  will  become  reconciled 
to  scientific  salesmanship. 

163.  English  Selling  Methods.  Capital,  in 
England,  may  not,  with  propriety,  seek  its  re- 
quirements from  strangers.  Introductions  are 
necessary  for  immediate  contact.  The  cus- 
tomary communication  with  private  persons  is 
through  solicitors  or  through  brokers ;  with  in^ 
stitutions  like  insurance  companies  it  is 
through  company  brokers.  It  is  not  good 
form,  in  turn,  for  the  brokers  to  advertise,  or 
to  circularize  any  except  people  to  whom  they 
are  known  in  a  personal  way.  The  distinction 
between  banking  and  brokerage  houses  is  care- 
fully preserved,  and  business  regulations,  gen- 
erally, tend  to  recognize  the  difference  between 
merchants  of  securities  and  counsellors  regard- 
ing their  sale.  Therefore,  it  is  far  more  dif- 
ficult to  rob  the  unsophisticated  part  of  the 
British  public  than  Americans  who  are  un- 
familiar with  securities. 


98        THE  ADVISORY  FUNCTION 

164.  Just  as  Easterners  believe  that  West- 
ern business  men  more  highly  esteem  optimism 
and  debonair  aggressiveness  as  business  vir- 
tues, than  accuracy  and  unbiassed  judgment, 
so  the  British  rightly  regard  us  as  a  nation  of 
special  pleaders  in  matters  of  industry. 

165.  Financial  Advisory  Systems.  Never- 
theless, the  change  in  this  respect  that  has 
taken  place  among  us  during  the  past  decade 
has  been  very  remarkable  indeed.  In  response 
to  a  real  demand  a  number  of  investment  ad- 
visory systems  have  sprung  up,  v^hich,  with 
nothing  but  financial  information  for  sale,  en- 
deavor to  work  with  bond  houses  and  other 
banking  institutions  in  disseminating  reliable 
news  and  opinions.  I  have  already  referred 
to  some  of  these  advisory  systems  in  mention- 
ing the  statistical  helps  that  are  available  to 
the  professional  buyers  in  bond  houses.  How- 
ever, in  our  country  every  now  and  again  one 
of  these  systems  will  lapse  from  its  good  call- 
ing to  deal  in  securities,  directly  and  frankly, 
or  by  subterfuge.  It  is  then  in  the  category  of 
a  physician  who  prescribes  to  a  patient  nos- 
trums in  which  he  has  a  pecuniary  interest. 
The  time  will  come  when  such  a  state  of  things 
will  be  as  inconceivable  in  securities  as  in 
medicine.  Surely,  it  is  very  short-sighted 
policy  thus  to  invite  distrust  and  disrepute 
from  the  public  at  large,  as  well  as  to  alienate 


THE  ADVISORY  FUNCTION        99 

the  bond  houses  which  are  still  the  principal 
sustenance  of  these  systems. 

166.  The  greatest  single  influence  affecting 
security  purchases  in  America  is  probably  the 
press  in  its  narrative  and  editorial  capacity. 
The  next  greatest  influence,  perhaps,  is  the 
American  custom  of  personal  solicitation  by 
security  salesmen.  Solicitation  is  the  apt 
word — unfortunately  shall  we  say?  The  third 
influence  may  be  the  press  in  its  advertising 
capacity. 

167.  Bond  Advertising.  Until  very  recently 
there  were  only  two  kinds  of  advertising  a  kid 
glove  bond  house  might  do.  The  first  was  to 
insert  a  "card"  with  the  firm  name  (and  mem- 
bership maybe),  and  with  the  briefest  possible 
statement  of  the  various  banking  functions. 
To  this  might  be  added,  parenthetically  as  it 
were,  the  fact  that  securities  were  bought  and 
sold — of  course  for  the  accommodation  of  cli- 
ents. The  second  was  to  print  a  broadside, 
offering  an  issue  of  bonds  with  particulars  re- 
garding the  form,  interest  rate,  price,  dura- 
tion, etc.,  but,  for  the  sake  of  dignity,  with  all 
arguments  to  prove  the  issue  a  desirable  in- 
vestment couched  in  a  letter  purporting  to 
come  from  the  president  of  the  obligor  com- 
pany. 

168.  General  Publicity.  Roth  of  these 
forms   of  advertising  are   useful   and   proper. 


100      THE  ADVISORY  FUNCTION 

The  cost  of  the  first  must  be  charged  to  "Gen- 
eral Publicity,"  a  most  unsatisfactory,  if  neces- 
sary, account.  The  cost  of  the  second  may  be 
charged  to  the  account  of  a  definite  series  of 
transactions,  namely,  the  purchase  and  subse- 
quent sale  of  the  issue  advertised;  but  very 
much  less  business  than  most  people  suppose 
directly  results  from  this  kind  of  expenditure. 
It  is  now  not  unusual  for  a  bond  house  to 
make  such  a  public  offering  and  calmly  state 
at  the  bottom  that  all  the  bonds  are  sold  and 
the  advertisement  is  "merely  a  matter  of  rec- 
ord." But  more  commonly,  if  the  issue  is  of 
such  a  nature  as  to  sell  itself  out  of  the  hands 
of  the  underwriters  into  the  hands  of  the  sec- 
ondary purchasers,  the  public  offering  is  sup- 
posed to  be  good  for  a  time  from  5  minutes  to 
a  day  after  the  opening  of  the  books  for  orders. 
169.  Advertising  Investment  Principles.  A 
third,  more  recent  form  of  advertisement,  de- 
serves all  the  encouragement  in  resultant  busi- 
ness that  it  can  get,  for  when  properly  con- 
ducted it  is  a  very  influential  expression  of 
the  bond  houses  in  their  advisory  capacity. 
This  form  discusses  the  nature  and  the  es- 
sential elements  of  investment  with  the  ap^ 
plication  of  this  nature  and  these  elements  to 
the  needs  of  some  class  of  investors  or  to  the 
characteristics  of  some  bond  issue.  A  glance 
at  the  financial  page  of  the  principal  New  York 


THE  ADVISORY  FUNCTION       101 

daily  papers  will  recall  just  which  high-grade 
houses  use  this  method  of  advertisement,  and 
how  "Advisory  advertisment"  ought  to  pay 
best.  Perhaps  it  does,  because  it  gives  a 
reader  the  impression  that  the  signatory  house 
has  a  full  sense  of  its  duty  as  counsellor  of 
investments. 

170.  It  is  not  easy  to  write  such  advertise- 
ments. Any  series  of  notices  on  the  same 
theme  becomes  monotonous  after  a  while.  De- 
liberate repetition  is  less  hum-drum  than  un- 
skilful variation.  Space  is  costly,  and  nothing 
but  broad  generalization  is  possible  in  two 
inches  of  single  column.  But  if  advertise- 
ments are  meant  to  be  read,  this  third  class  is 
useful  as  well  as  significant  of  a  growing  pro- 
fessional sense  among  the  bond  houses. 

171.  Special  Circulars.  Less  recent  in  origin 
and  of  greater  vogue  is  the  special  circular  con- 
taining investment  truths.  Usually  it  is  truth, 
if  not  wholly  sincere.  One  should  not  expect 
too  much,  and  the  difiference  between  truth- 
fulness and  entire  sincerity  is  the  difference 
between  the  best  spirit  in  modern  business  and 
the  spirit  of  the  millennium.  In  other  words, 
the  statements  on  the  bond  house  circular  are 
facts.  They  can  be  relied  on.  They  are  as 
exact  as  brains  and  care  can  make  them.  What 
one  must  look  twice  for,  however,  are  the 
omissions.     These  remarks  apply  not  only  to 


102      THE  ADVISORY  FUNCTION 

the  brochures   on   general   investment  topics, 
but  to  the  circular  offerings  as  well. 

172.  Investment  by  Correspondence.  Lastly, 
the  bond  houses  have  opportunity  to  direct 
investments  wisely  by  means  of  correspond- 
ence. Very  little  of  this  correspondence  origi- 
nates with  the  investor.  Most  of  it  is  the 
"confirmation"  in  writing  of  offers  made  by 
salesmen.  The  confirmation  is  the  excuse  for 
a  more  direct  and  personal  presentation  of  the 
merits  of  the  issue  or  issues  that  have  been 
offered.  Not  being  of  public  knowledge  it  is 
more  likely  to  express  the  true  character  of 
the  house. 

173.  If,  therefore,  you  wish  to  test  the 
quality  of  half-a-dozen  banking  houses,  send 
each  of  them  a  letter  of  the  following  purport : 
"Brown,  Jones  &  Robinson. 

Gentlemen : — My  husband  has  recently  died 
leaving  me  with  $25,000  which  is  distributed  in 
the  savings  banks  of  the  neighborhood. 
Would  you  advise  that  I  keep  some  or  all  of 
it  there,  or  put  it  into  bonds  or  mortgages? 
If  in  bonds,  what  kind  of  bonds  should  I  buy, 
and  have  you  any  to  suggest. 

Thanking  you  for  your  attention,  etc." 
The  gentle  feminine  reader  will  do  well  to 
insert  some  little  fib  about  being  too  delicate 
to  receive  strangers,  or  in  twenty-four  hours 


THE  ADVISORY  FUNCTION       103 

the  neighborhood  will  think  she  has  advertised 
for  another  husband. 

Seriously,  it  is  no  fault  to  see  business  large 
in  such  a  letter  and  to  set  hot  foot  after  it,  but 
whether  reply  is  first  by  letter,  as  it  should  be, 
or  by  visitation,  a  keen  person  will  appreciate 
which  banking  houses  are  true  to  their  proper 
advisory  function  and  which  are  mere  pedlers 
of  paper. 


CHAPTER  VII. 

THE  PROTECTIVE  AND  BANKING 
FUNCTIONS. 

174.  The  Mercantile  vs.  the  Protective 
Policy.  The  work  of  the  bond  house,  as 
trustee  for  its  clients,  is  closely  associated  with 
its  advisory  function,  which  we  have  just  con- 
sidered. Again  attention  is  called  to  the 
alternatives  it  faces.  It  may  have  inherited 
and  accepted  the  purely  mercantile  policy.  It 
may  consider  itself  merely  a  merchant  of  se- 
curities, with  cessation  of  all  responsibility  to 
its  customers  on  fulfillment  of  the  selling  con- 
tract, written  or  implied.  Or  on  the  other 
hand  it  may  assume  the  protective  function 
without  criticism  or  demur  from  any  source, 
and  feel  a  moral  responsibility  concerning 
every  bond  it  has  placed  with  persons  or  in- 
vestment institutions.  Of  course  it  will  never, 
under  any  circumstances,  feel  bound,  except 
as  a  matter  of  policy,  to  make  good  any  kind 
of  loss,  that  ensues  from  issues  it  has  handled 
that  originally  were  investigated  and  bought 
by  brokers  or  other  banking  houses;  nor  will 
it  feel  bound  with  respect  to  persons  or  insti- 
tutions that  have  made  their  purchases  of  its 
own     specialties     indirectly,     through     other 

104 


THE  BANKING  FUNCTION        105 

houses.  Indeed,  some  bond  houses  will  deal 
on  the  street  and  among  houses  of  other  cities 
in  securities  they  would  not  offer  to  clients. 

175.  The  Spirit  of  Trusteeship.  The  sense 
of  obligation,  the  spirit  of  "trusteeship"  may 
find  expression  in  a  binding  contract,  or  in  a 
deliberately  advertised  policy,  or  it  may  be 
known  only  when  put  to  the  test  of  financial 
trouble. 

176.  Bond  Guaranty.  One  cannot  with  good 
grace  criticize  the  spirit  of  obligation  that  ex- 
presses itself  in  a  guaranty  of  bond  issues, 
whether  this  guaranty  is  of  a  banking  house 
direct,  as  rarely,  or  of  a  trust  company^  or  of 
a  guaranty  company.  Such  criticism,  more- 
over, is  likely  to  meet  with  little  sympathy  in 
most  quarters.  The  conspicuous  success  of 
certain  guaranty  companies  will  rise  up  and 
overshadow  the  numerous  obscure  failures. 
Guaranties  can  be  made  sound.  There  is  no 
doubt  of  that.  They  have  been  made  sound 
in  notable  instances.  But  there  are  certain 
postulates  to  soundness  that  seem  to  preclude 
the  guaranty  principle  from  being  generally 
sound.  The  securities  guaranteed  must  be  of 
a  high  order  of  safety  in  themselves,  and  the 
guarantor  company  must  have  assets  far  in  ex- 
cess of  any  probable  demand  of  contingent  lia- 
bilities. But  securities  of  the  sort  that  are 
appropriately  guaranteed  hardly  need  the  pro- 


106   THE  PROTECTIVE  FUNCTION 

tection,  and  directly  or  indirectly,  a  part  of  the 
profits  from  their  sales  must,  through  long 
years  go  to  the  upbuilding  of  the  equity  in  as- 
sets that  gives  the  guaranty  value. 

177.  Furthermore,  the  principle  back  of  the 
guaranty  is  an  insurance  principle,  not  an  in- 
vestment principle.  Insurance  must  be  paid 
for.  It  is  paid  for  by  the  insured.  The  in- 
sured has  to  pay  not  only  for  indemnity  but 
for  the  cost  of  clearing  the  insurance,  i.  e.,  the 
guaranty  company's  operations. 

178.  The  Cost  of  the  Guaranty.  The  intelli- 
gent investor,  who  can  choose  a  safe  invest- 
ment, yet  pays  for  a  guaranty,  assumes  the  bur- 
den of  the  unintelligent  investor.  What  is  the 
price?  Well,  in  real  estate  mortgages,  v^here 
the  guaranty  principle  has  been  developed 
most  fully,  the  customary  cost  to  the  intelli- 
gent investors  of  his  weaker  brethren's  lia- 
bilities of  loss  equals  one-ninth  of  his  income  ; 
rather  costly  charity,  is  it  not?  It  is  only  fair, 
however,  to  state  that  this  one-ninth  covers 
not  only  the  cost  of  certainty  of  payment,  but 
the  cost  of  promptness  of  payment,  and  relief 
from  all  details  of  investment  management. 

179.  In  bonds,  this  one-ninth  (assuming  one- 
ninth  of  income  to  be  the  cost)  could  not  be 
made  to  cover  promptness  and  relief  from  de- 
tails as  well  as  certainty,  because  in  bonds  the 
former  two  of  these  three  investment  elements 


THE  BANKING  FUNCTION        107 

exist  in  a  far  higher  degree  and  are  part  com- 
pensation for  a  possible  less  income,  other 
things  being  equal. 

180.  It  is  to  be  observed,  and  quite  naturally 
enough — that  the  guaranty  is  more  commonly 
used  to  reinforce  real  estate  bonds  than  any 
other  kind ;  and  of  real  estate  bonds,  those  se- 
cured by  farm  mortgages.  Farm  mortgage 
real  estate  bonds  are  now  invading  the  East 
as  never  before.  One  or  two  well-known  Wall 
Street  houses  built  up  their  business  on  this 
paper  in  days  gone  by.  But  now  Tom,  Dick 
and  Harry  are  in  the  field  selling  securities 
that  have  been  dug  up  and  guaranteed  in  Texas 
and  Oklahoma  by  local  trust  and  mortgage 
companies. 

181.  Oklahoma,  by  the  way,  has  had  to  learn 
by  costly  experience  the  insurance  principle 
that  underlies  the  guaranty.  It  is  to  be  ques- 
tioned whether,  in  the  long  run,  bond  guar- 
anties will  prove  any  more  economically  sound 
than  bank  deposit  guaranties,  in  Oklahoma  or 
anywhere  else.  One  must  not  forget  that 
there  is  a  distinct  difference  between  the  dis- 
tribution of  risk,  as  in  fire  and  life  insurance, 
where  accidents  and  loss  are  inevitable,  un- 
foreseeable, and  in  investment  where  one  can 
choose  the  degree  of  risk  he  is  willing  to  as- 
sume. 

182.  The    Protective    Function    Applied    to 


108    THE  PROTECTIVE  FUNCTION 

Marketability.  The  protective  function,  as  an 
advertised  moral  obligation,  is  usually  con- 
fined to  matters  of  negotiability.  It  is  not 
good  form  and  it  certainly  would  be  poor  busi- 
ness to  advertise  that  one  w^ould  make  good 
all  losses  due  to  suspension  of  interest  or  prin- 
cipal payments.  A  house  that  w^ill  create  a 
market  for  its  issues  has  burden  enough  to 
carry  to  fulfill  its  pledge.  The  truth  of  this 
has  been  strikingly  evident  these  past  three 
years  cf  declining  bond  prices.  Nevertheless, 
in  the  face  of  the  decline  the  policy  of  creating 
a  market  for  "specialties"  is  steadily  growing 
and  advertisements  to  this  efifect  are  coming 
to  be  looked  upon  as  a  matter  of  course. 

183.  The  amount  of  "protection"  afforded  by 
the  creation  of  a  specialty  market  depends,  of 
course,  upon  the  price  at  which  a  bond  house 
is  willing  to  buy  back  the  issues  it  has  fathered. 
We  are  likely  to  forget  that  the  "security"  of 
a  bond  is  a  very  complex  thing.  Security  of 
principal  and  security  of  interest,  for  example, 
are,  or  may  be,  quite  distinct  and  almost  un- 
related investment  elements.  This  fact  is  most 
appreciable  in  income  bonds.  Likewise  se- 
curity of  principal,  as  determined  by  the  prob- 
ability of  the  payment  of  the  face  of  the  bond 
at  maturity,  and  security  of  principal  as  de- 
termined by  the  probability  of  conversion  in 
cash  without  loss  during  the  life  of  the  loan 


THE  BANKING  FUNCTION        109 

are  two  distinct  and  almost  unrelated  invest- 
ment elements, 

184.  To  make  practical  application  of  this 
thought  to  the  bond  business, — I  have  much 
greater  confidence  that  New  York  City  43/2's 
of  1956  will  be  paid  when  due  than  I  have  that 
the  Blank  Electric  Company  First  Mortgage 
5's  of  1949  will  be  redeemed  at  maturity.  But 
if  I  may  need  to  cash  my  investment  five  years 
from  now  I  have  greater  confidence  that 
Brown,  Jones  &  Robinson  will  pay  me  within 
two  points  of  what  the  Blank  Electric  5's  cost 
than  that  the  open  market  for  New  York  City 
4^'s  of  1956  will  be  within  two  points  of  the 
present  market.  Thus  by  exercising  the  pro- 
tective function  marketwise  Brown,  Jones  & 
Robinson  are  strengthening  the  securit3^-in- 
liquidation  of  my  investment  quite  apart  from 
security-in-redemption. 

185.  The  Cost  to  Clients  of  Artificial  Mar- 
ketability. In  the  previous  paragraph  a  two 
point  difference  was  suggested  as  a  possible 
"expectation  of  loss"  due  to  liquidation  of 
specialties,  under  normal  conditions  when  the 
specialties  were  protected  by  the  sponsoring 
bond  house.  I  think  that  two  points  is  a  fair 
figure.  If  there  has  been  a  substantial  appreci- 
ation in  any  given  bond  these  may  be  no  loss 
but  in  fact  a  gain.  Conversely  if  the  whole 
bond   market  is  "off"   the  loss  in   liquidation 


no    THE  PROTECTIVE  FUNCTION 

may  be  more  than  two  points.  If  the  issue 
has  become  "digested"  like  the  Aurora,  Elgin 
and  Chicago  First  5's,  the  Union  Electric  Light 
and  Power  Co.  (St.  Louis)  First  5's  or  the  Mil- 
waukee Gas  Co.  First  4's,  then  the  margin  be- 
tween selling  price  and  subsequent  buying 
price  will  be  narrower  than  if  the  issuing 
house  has  still  a  large  unsold  block  on  its 
hands. 

186.  As  you  stop  to  think  of  it,  what  a  re- 
markable situation  you  face  when  a  body  of 
merchants  (security  merchants)  have  so  de- 
veloped the  paternalistic  function  that  they 
can  adopt  a  policy  of  buying  back  at  a  fair 
price  what  they  have  once  sold  you,  after  years 
of  alien  ownership.  Fortunately  securities, 
like  wine  and  friends  do  not  become  second 
hand  and  are  likely  to  improve  with  age. 

187.  Bonds  as  Collateral.  No  other  type  of 
investment  security  has  developed  this  kind 
of  convertibility  to  such  an  extent  as  bonds. 
The  loan  value  of  bonds  exceeds  that  of  all 
other  kinds  of  pure  investment.  As  I  have 
said  previously,  the  highly  desirable  hypothe- 
cary value  of  bonds  is  largely  overlooked  by 
professional  men  who  seek  a  channel  for  their 
surplus;  it  is  overlooked  by  most  people  who 
have  little  dealing  with  banks.  The  great  sys- 
tem of  American  bond  houses  is  built  and 
financed  on  the  superior  hypothecary  value  of 
bonds. 


THE  BANKING  FUNCTION        111 

188.  Then  do  I  make  myself  clear  when  I 
say  that  the  bond  houses,  in  protecting  to  the 
full  the  convertibility,  or  negotiability,  of  their 
securities,  stand  ready  to  act  in  the  double  ca- 
pacity of  buyers  and  bankers?  To  accommo- 
date you,  so  that  you  need  not  lose  money, 
they  will  buy  of  you  or  loan  to  you. 

189.  The  Banking  Function  of  Bond  Houses. 
This,  therefore,  is  the  genesis  of  the  banking 
function,  to  protect  clients  who  need  only 
temporary  realization  on  their  securities.  But 
the  bond  houses  are  fully  equipped  with  men, 
methods,  and  machinery,  to  say  nothing  of 
temper,  for  the  conduct  of  any  sort  of  bank- 
ing, in  so  far  as  it  relates  to  the  personal  affairs 
of  their  clients.  They  do  not  make  good  com- 
mercial banks  to  be  sure;  they  are  not  good 
banks  of  discount;  but  as  banks  of  deposit,  for 
checking  accounts,  or  for  savings  or  for  per- 
sonal loans,  they  do  as  well  as  any,  and  I  have 
no  question  the  good  ones  are  as  safe  as  the 
average  "institutional"  bank,  if  not  safer. 

190.  The  Cost  to  Bond  Houses  of  Artificial 
Marketability.  It  is  evident'  that  there  is  no 
profit  in  repurchasing  bonds  to  protect  clients. 
Two  points  is  a  low  cost  of  liquidation.  If 
five  to  fifteen  points,  plus  a  stock  bonus,  rep- 
resents the  initial  selling  cost  plus  a  fair  profit, 
two  points  cannot  represent  any  profit  over 
the  cost  of  a  second  sale  of  inactive  securities, 


112    THE  PROTECTIVE  FUNCTION 

even  conceding  that  the  selling  cost  becomes 
less  as  the  issue  becomes  assimilated  and  the 
"campaign  of  education"  begins  to  bring  its 
results.  Moreover,  in  the  majority  of  cases 
Ihe  resale  of  the  old  security  with  a  two  point 
gross  profit  prevents  the  initial  sale  of  a  like 
"undigested"  security  with  its  five  to  fifteen 
point  profit. 

191.  If,  on  the  other  hand,  we  deal  in  a  bond 
that  will  resell  itself,  then  the  repurchase  price 
will  not  be  a  fixed  difiference  from  the  original 
sale  price  but  will  be  determined  by  the  public 
market.  Therefore,  although  the  cost  to  the 
bond  house  of  finding  a  second  purchaser  will 
be  nominal,  its  profit  will  also  be  purely  nom- 
inal because  it  must  bid  for  the  bond  approxi- 
mately at  the  market. 

192.  Thus  far  we  have  considered  the  pro- 
tective function  in  relation  to  guaranty  and 
marketability. 

Marketability,  you  remember,  is  only  one  of 
the  two  sides  of  negotiability ;  only  one  of  the 
forms  of  convertibility.  Bonds  do  not  have  to 
be  sold  to  be  converted.  They  may  be  con- 
verted temporarily  by  hypothecation. 

193.  The  Bond  Houses  as  Banks  of  Deposit. 
We  of  the  profession  are  inclined  to  take  good 
humoredly,  if  not  quite  seriously,  the  efiforts  of 
the  younger  and  therefore,  perhaps,  more  am- 
bitious bond  houses  to  build  up  their  business 


THE  BANKING  FUNCTION        113 

by  the  opening  of  interest-bearing  deposit  ac- 
counts— or  whatever  you  would  call  them. 
The  underlying  motive  is  the  same  as  that 
back  of  $100  pieces  of  bonds.  Selfishly,  to 
widen  the  clientele  and  educate  to  bond  buy- 
ing; unselfishly  to  encourage  thrift  in  this  very 
extravagant  nation.  Interest-bearing  deposit 
accounts,  subject  to  check,  and  bonds  of  $100 
denomination  are  not  in  the  same  category  as 
bonds  bought  on  the  instalment  plan.  Instal- 
ment bond  buying  has  some  of  the  same 
strength  and  weakness  as  ordinary  insurance. 
It  encourages  "saving"  to  be  sure,  but  it  com- 
mits one  to  engagements  one  may  not  be  able 
to  fulfill.  It  is  not  investment,  except  when 
it  has  "paid  up"  value.  But  a  deposit  ac- 
count with  a  bond  house  leaves  you  a  free 
agent  as  to  further  transactions. 

194.  The  other  aspects  of  the  banking  func- 
tion are  not  of  sufficient  importance  to  retail 
here,  and  they  have  little  or  no  relation  to  the 
protective  functions,  about  which  we  do  well 
to  center  our  attentifjn. 

195.  The  Protective  Function  Applied  to  All 
Bond  Qualities.  Up  to  this  point  the  present 
paper  has  not  dealt  with  that  phase  of  the 
business  which  comes  most  quickly  to  mind 
when  one  speaks  of  the  protective  function. 
Broadly  considered  the  protective  function  can 
be  exercised — should  be  exercised — in  the  in- 


114    THE  PROTECTIVE  FUNCTION 

terest  of  any  of  the  ten  elements  or  good 
qualities  that  go  to  the  making  of  an  ideal  in- 
vestment. Those  qualities,  you  will  remem- 
ber, were  distinguished  as  follows: 

Security  of  principal 

Security  (or  stability)  of  income 

Fair  income  return 

Marketability  )  ^  .•.•,•. 

,,  ,  „  ,   J-  Convertibility 

Value  as  collateral  J 

Tax-exemption 

Freedom  from  care 

Acceptable  duration 

Acceptable  denomination 

Potential  appreciation. 

196.  The  action  and  interaction  of  these 
qualities,  one  upon  another,  and  the  part  of 
the  bond  house  in  assisting  the  work,  has  just 
been  fully  illustrated.  We  have  deliberated 
over  the  quality  called  marketability,  and  over 
the  quality  called  hypothecary  value  (or  value 
as  collateral)  and  perhaps  have  convinced  our- 
selves that  in  furthering  these  virtues  in  any 
investment  a  house  is  furthering  the  security 
of  that  investment. 

197.  So,  also,  the  protective  function  may 
be  extended  over  the  whole  elements  or 
qualities,  over  some  in  greater  degree  than 
over  others.  As  to  the  second  of  these,  for 
instance :  Stability  of  income — banking  houses 
frequently  pay  the  interest  of  railroad  obliga- 


THE  BANKING  FUNCTION        115 

tions  during  a  season  of  duress  until  reor- 
ganization plans  perfect  the  ultimate  adjust- 
ment of  the  loan.  There  may,  of  course,  be 
an  ulterior  motive  to  the  payment,  such  as  to 
gain  control  of  the  issue  in  question,  but  again 
control  is  probably  desired  for  concerted  ac- 
tion for  the  benefit  of  the  security  holders. 
Bond  houses  are  generally  back  of  bond- 
holders' protective  committees.  In  the  pres- 
ent difficulties  of  the  Wabash  there  are  oper- 
ative just  such  measures  protective  of  the 
coupons  of  the  First  Refunding  and  Extension 
4s. 

198.  Protecting  Security,  bat  w^hen  all  is 
said  and  done  the  protective  function  is  most 
important  in  relation  to  the  security  of  the 
invested  principal.  An  ounce  of  prevention 
should  have  been  applied  in  purchasing  the 
issue  to  oflfer  to  clients.  In  want  of  the  ounce, 
a  pound  of  cure  may  be  available.  There  are 
certain  bond  houses  that  for  a  few  years  past 
have  yielded  little  or  no  return  to  their 
proprietors.  The  profits  from  merchandising 
have  been  devoted  to  the  payment  of  losses 
for  which  these  houses  are  not  legally  re- 
sponsible, but  which  they  voluntarily  assume 
in  the  interest  of  their  clients, 

199.  Assuming  Losses.  A  member  of  one 
of  the  better  New  York  houses  illustrates  the 
point    as    follows:      "A    group    of    bankers 


116    THE  PROTECTIVE  FUNCTION 

handled  the  bonds  of  a  hydro-electric  com- 
pany. The  company  had  been  in  operation 
but  a  comparatively  short  time  when  a  ter- 
rific flood  carried  away  the  dam  and  did  other 
damage  which  virtually  destroyed  the  power 
plant.  The  bankers  came  forward  and  recon- 
structed the  dam  and  the  power  houses  at  a 
cost  of  about  three-quarters  of  a  million  dol- 
lars. For  their  advances  to  the  company  they 
took  junior  securities,  which  have  a  very  ques- 
tionable value.  It  will  be  a  great  many  years 
before  the  bankers  will  get  back  the  money 
they  advanced,  if,  in  fact,  they  ever  do.  They 
took  this  action  with  a  view  only  of  protect- 
ing the  interests  of  their  clients,  who  had  pur- 
chased the  first  mortgage  bonds  of  the  com- 
pany. Had  they  not  provided  the  funds  for 
the  reconstruction  of  the  dam  and  plant  their 
bondholders  would  have  suffered  heavy  losses. 
The  bankers,  although  they  were  not  legally 
liable,  preferred  to  make  a  heavy  sacrifice 
rather  than  have  their  bondholders  suffer." 

200.  Protection  in  Reorganization.  The 
Street  was  agog  last  winter  over  an  extraor- 
dinary Christmas  gift  voted  the  president  of 
one  of  the  big  trust  companies.  This  gift  was 
the  tribute  of  the  board  of  directors  to  a 
talent  for  protecting  distressed  security  hold- 
ers and  rehabilitating  depleted  properties. 
Reconstruction  is  almost  as  important  as  con- 


THE  BANKING  FUNCTION        117 

struction.  Few  of  our  great  railroads  have 
attained  an  investment  level  for  their  securi- 
ties until  they  have  been  through  one  or  two 
receiverships.  The  record  of  street  railways 
is  no  better.  As  a  class  public  utility  com- 
panies have  fared  better  than  railroads  be- 
cause they  came  later  and  were  developd  (i.  e., 
refinanced)  by  investment  houses,  not  by 
speculative  cliques;  by  institutions  that  had 
either  a  conscience  or  a  sense  that  honesty  is 
the  best  policy,  not  by  buccaneers  of  finance 
who  are  in  business  for  what  they  can  get 
out  of  it — nothing  more. 

201.  As  I  read  the  proof  of  this  text  be- 
fore it  goes  to  press  a  letter  comes  to  me  from 
a  Connecticut  investor  containing  the  follow- 
ing: 

*T  could  tell  you  of  one  dealer  in  securities 
who  in  the  course  of  a  dozen  years  or  so  has 
built  up  his  business  from  practically  nothing 
to  a  turnover  of  two  or  three  millions  a  year, 
partly  because  he  ascertained  values,  partly 
because  he  never  misrepresented,  and  partly 
because  he  did  his  best  to  stand  between  his 
clients  and  loss.  There  are  better  ways  of  get- 
ting money  out  of  people  than  by  fleecing 
them  and  better  ways  of  getting  the  value  out 
of  life." 

202.  The  old  and  the  new  modes  of  Amer- 
ican  finance  are   very   properly   signalized   by 


118   THE  PROTECTIVE  FUNCTION 

the  black  death's  head  on  the  red  field  and 
the  red  cross  on  the  white  field,  respectively. 
The  supremacy  of  the  latter  emblem  we  owe 
to  the  highly  developed  protective  function 
of  the  bond  houses,  and  to  the  caution,  among 
them,  that  the  protective  policy  fosters. 


CHAPTER  VIII. 

SELLING   BONDS— THE   BANKER'S 
VIEWPOINT. 

203.  However  much  we  may  emphasize  the 
importance  of  various  other  bond  house  func- 
tions, it  must  be  confessed  that  they  are  trib- 
utary to  and  exist  by  grace  of  the  selling 
function.  Bond  firms  are  merchants  of  se- 
curities ;  they  are  in  business  to  make  money, 
not  by  trading  in  interest  but  by  selling  paper. 

The  Development  of  Bond  Selling.  If  suc- 
cessful selling  is  the  goal,  then  we  should  ex- 
pect in  the  selling  end  of  the  business  an  ex- 
penditure of  energy  and  attention,  money  and 
men,  a  concentration  of  vital  force,  out  of 
all  proportion  to  the  other  activities  of  the 
firm ;  and  we  find  it.  We  should  also  expect 
well-established,  generally  accepted  selling 
principles,  that,  when  conscientiously  fol- 
lowed, would  lead  to  reasonably  assured 
profits;  but  we  don't  find  them. 

204.  There  can  be  no  question,  now,  that 
there  is  a  science  of  bond  investment,  viz.,  of 
bond  buying.  The  principles  of  bond  invest- 
ment, or  bond  buying,  arc  the  corpus  of  a  new 
science:  a  branch  of  applied  economics  in  the 
family  tree  of   the  sciences.     There  is  not  yet 

119 


120  SELLING  BONDS— 

a  science  of  bond  selling,  in  spite  of  the  im- 
mense importance,  and  need,  and  money  profit 
when  that  is  developed. 

205.  It  will  not  do  to  waive  the  matter  aside 
by  saying  that  salesmanship  is  an  art.  To  be 
sure  it  is.  So  is  conduct.  But  because  con- 
duct is  an  art  there  is  no  reason  for  overlook- 
ing the  study  of  ethics,  which  is  the  branch 
of  philosophy  that  forms  the  scientific  basis 
for  conduct.  The  verve,  the  force,  the  fire 
of  successful  salesmanship  are  not  hindered 
but  helped  by  cool  calculation  of  the  sources 
and  efforts  of  enthusiasm,  of  the  cost  of  com- 
petitive representation  and  of  the  most  ef- 
fective methods  of  publicity.  What  better 
proof  can  you  have  that  salesmanship  has 
principles,  ergo,  is  a  science,  than  the  fact  that 
good  salesmanship  is  perpetuated  in  certain 
well-known  industrial  organizations  after  the 
brains  that  built  the  selling  departments  were 
transferred  to  other  fields  of  activity?  The 
cash  register  and  automobile  industries  illus- 
trate the  point  I  am  making. 

206.  The  Trouble  with  Bond  Selling.  What 
then,  it  will  be  asked,  is  the  trouble  with  bond 
selling?  In  what  specific  features  does  it  fall 
short  of  reasonable  efficacy?  I  believe 
thoughtful  bond  men  will  agree  with  me  as  to 
the  weakness  of  the  present  system,  although 
there  may  be  no  agreement  regarding  rem- 
edies. 


THE  BANKER'S  VIEWPOINT     121 

207.  The  Cost  of  Selling.  The  greatest 
weakness  is  the  cost  of  selling  securities, — the 
cost  of  distribution.  The  enlargement  of  or- 
ganization and  concentration  of  capital  that 
are  the  chief  characteristics  of  modern  in- 
dustry are  permitted  to  exist,  in  spite  of  the 
evils  engendered,  because  of  the  resulting  less- 
ened costs  of  producing  and  distributing  com- 
modities. It  has  been  estimated — with  what 
correctness  I  do  not  know — that  the  actual 
cost  of  producing  and  distributing  the  com- 
mon articles  of  consumption  has  been  less- 
ened by  about  2^^  per  cent,  a  year  for  the 
last  few  years.  Parenthetically,  if  this  be  the 
case  so  much  more  glaring  are  the  counter- 
acting forces :  an  absurd  tariff,  congestion  of 
population,  a  plethora  of  gold,  and  national 
extravagances, — that  are  steadily  forcing  up- 
ward prices  the  consumer  has  to  pay.  It  is 
improbable  that  the  cost  of  selling  securities 
is  lessening,  for  the  number  of  small  com- 
petitive houses  is  rapidly  increasing  and  there 
is  yet  no  tendency  toward  amalgamation. 

208.  The  Profit  in  Specialty  Selling.  In 
speaking  of  the  gross  profit  of  from  5  to  15 
points  plus  stock  bonus  made  by  the  bond 
houses  in  their  specialties,  I  contended  that 
the  amount  was  not  excessive,  considering  the 
cost  of  distribution.  T  suppose  in  this  case 
the  cost  of  manufacture  or  production  may  be 


122  SELLING  BONDS— 

considered  to  be  the  salaries  and  expenses  of 
the  buying  and  statistical  force  and  a  portion 
of  the  overhead  charge.  The  cost  of  manu- 
facture, so  to  speak,  is  small,  relative  to  the 
selling  cost,  and  therefore,  negligible  in  this 
study. 

209.  However,  a  gross  profit  of  5  to  15  per 
cent,  (more  commonly  5  than  15)  would  be 
excessive  under  a  modern,  enlightened  selling 
plan.  No  words  then  should  be  needed  to 
convince  the  investing  public  that  they  have 
as  vital  an  interest  in  the  vending  methods 
of  the  bond  houses  as  they  have  in  the  way 
coal,  oil,  meat  and  milk  are  obtained  and 
brought  to  their  doors. 

210.  Probably  most  of  those  who  read  this 
article  have  some  notion  of  the  way  bonds  are 
sold — particularly  high-yield  bonds  of  little 
vogue  or  market,  destined  largely  for  the  pri- 
vate investor.  Each  new  issue  means  the  cir- 
cularization  of  almost  the  entire  list  of  the 
issuing  house,  extensive  advertising,  the  sub- 
mission of  offers  by  travelling  salesmen  who 
put  up  at  the  best  hotels  and  cover  an  ex- 
tensive territory,  and  the  confirmation  of  these 
offers  by  correspondence.  The  number  of  cir- 
culars sent,  miles  travelled  and  days  consumed 
by  representatives,  and  letters  written  per 
$1,000  bond  sold  of  profitable  paper,  would, 
however,  probably  open  the  eyes  of  the  most 


THE  BANKER'S  VIEWPOINT     123 

sophisticated  investor.     So  much  for  present 
costs. 

211.  I  state  with  confidence  born  of  observa- 
tion that  very,  very  few  selling  departments 
have  at  present,  or  have  outlined  for  ultimate 
development,  a  selling-  program  that  intelli- 
gently seeks  relief  from  excessive  costs  or  in 
other  ways  evidences  the  result  of  constructive 
thinking.  It  is  a  hit  or  miss,  catch-as-catch 
can  game,  won  by  those  with  the  shrewdest 
instincts  or  backed  by  the  most  ample  and  pa- 
tient capital.  Future  conditions  in  their  en- 
tirety are  unforeseeable  to  be  sure,  and  the 
best  laid  plans  go  awry ;  you  can't  anchor  even 
a  time-defying  educational  institution  to  the 
purposes  of  its  founders;  but  no  business  in 
these  transitional  days  has  a  mortgage  on  the 
prosperity  of  the  future  that  is  not  giving 
thought  to  present  selling  costs  and  is  not 
receptive  to  changes  in  its  sales  policy,  how- 
ever radical,  if  they  assure  abatement  of  ex- 
penses with  consequent  betterment  of  strategic 
position  with  respect  to  other  houses. 

212.  Failures  from  Competition  and  Miscar- 
riage of  Issues,  The  number  of  bond  organ- 
izations is  growing  so  rapidly,  and  the  com- 
petition is  becoming  so  keen,  that  the  next  ten 
years  will  probably  see  the  downfall  of  a  con- 
siderable number  at  least  of  the  Eastern  or- 
ganizations, where  the  crowding  is  most  no- 


124  SELLING  BONDS— 

ticeable, — particularly  of  organizations  that 
have  succumbed  to  the  temptation  to  take 
profitable  turnovers  rather  than  unquestion- 
able paper.  The  intention  may  be  of  the 
best, — but  then  we  all  know  of  a  place  said 
to  be  paved  with  good  intentions.  If  a  few 
issues  "go  wrong  on  a  house"  some  of  the 
clients  may  be  willing  to  forgive  and  forget, 
but  human  nature  is  human  nature,  and  the 
recollection  of  mishaps  outlives  the  memory 
of  splendid  successes. 

213.  Until  the  weeding  out  process  is  ac- 
complished by  miscarriage  of  bond  issues  or 
inability  to  make  expenses  over  a  series  of 
lean  investment  years  we  may  expect  an  ag- 
gravation of  the  state  of  things  recently 
described  to  me  by  an  Albany  salesman.  You 
know  every  salesman  considers  his  territory  is 
the  worst  in  the  world  from  a  selling  point  of 
view.  In  Boston,  to  be  sure,  every  third  man 
buys  bonds,  but  then,  every  second  man  sells 
them.  In  northern  Pennsylvania  there  are 
fewer  bond  men  but  nobody  buys  bonds.  So 
it  goes.  Well,  to  get  back  to  Albany:  I  said, 
"Jones,  how's  the  competition  these  days  up 
at  the  capital?"  "Competition!"  he  replied, 
grieved  at  the  question.  "There  is  none.  We 
all  walk  up  State  street  lock  step  and  toss  up 
to  see  who  goes  in  to  brace  our  man  and  find 
out  there's  nothing  doing." 


THE  BANKER'S  VIEWPOINT     125 

214.  Selling  Economies:  Consolidation  of 
Houses.  A  first  move  to  better  security  dis- 
tribution is  suggested  quite  naturally  by  the 
evolution  of  industry:  a  consolidation  of  bond 
houses.  We  have  seen  the  consolidation  of 
manufacturers,  of  middlemen,  and  of  producers 
of  raw  material.  Later  the  manufacturers  ab- 
sorbed the  middlemen,  and  still  later,  many 
of  the  producers.  It  has  taken  strenuous  Fed- 
eral activity  to  keep  the  agencies  of  transpor- 
tation out  of  the  same  encompassment.  Most 
recently,  and  as  rapidly  as  ever  before  in  in- 
dustry, there  has  been  coagulation  among  the 
banks,  particularly  of  course  in  New  York. 
Why  not  then  a  union  of  bond  houses,  which 
are  middlemen  between  the  coalescing  produ- 
cers of  securities  and  the  coalescing  financial 
institutions  that  consume  securities? 

215.  There  are  very  obvious  advantages  in 
any  possible  union  of  the  agencies  of  security 
distribution,  not  the  least  of  which  is  the 
greater  range  in  choice  of  issues  made  possible 
by  the  augmented  capital,  resources,  and  dis- 
tributing power.  Moreover,  duplicate  repre- 
sentation in  selling  would  cease.  Equally  im- 
portant, perhaps,  overhead  economies  are 
possible  just  as  in  non-financial  industry. 

216.  There  is  no  need  to  go  into  particulars; 
the  advantages  will  be  conceded.  Why  then 
is    no   tcndencv   observable    toward    the    con- 


126  SELLING  BONDS— 

solidation  of  bond  houses?  Is  it  not  for  the 
same  reason  that  Massachusetts  "Tech"  and 
Harvard  did  not  consolidate  a  few  years  ago; 
for  the  same  reason  that  physicians  do  not 
usually  practise  as  firms?  I  admit  neither 
analogy  is  perfect.  Property  considerations 
influenced  the  two  Massachusetts  universities, 
and  physicians  have  relatively  unimportant 
"over-heads"  to  curtail.  But  nevertheless, 
there  is  a  point  to  be  made.  In  a  greater  or 
less  degree,  according  to  the  quality  of  each 
firm,  the  bond  houses  stand  in  that  pro- 
fessional relation  to  their  clients  which  I  have 
emphasized,  so  that  the  selling  value  of  their 
sponsorship  of  issues  would  be  impaired  by 
partial  loss  of  identity  and  personality  oc- 
casioned by  consolidation.  A  firm  is  slow  to 
relinquish,  in  the  interest  of  economy,  a  pro- 
fessional relationship  and  standing  that  have 
taken  years  of  the  hardest  kind  of  effort  to 
achieve.  The  two  strongest  influences  affect- 
ing bond  sales  are  the  character  of  the  house 
and  liking  for  the  salesman.  Amalgamation 
would  mean  serious  impairment  of  at  least 
half  their  claim  upon  clients. 

217.  Local  Representation.  There  has  been 
a  development  in  bond  selling  that  is  away 
from  direct  competitive  representation,  namely 
the  representation  of  one  or  more  houses  by 
a  local  dealer.     Many  New  York  houses  have 


THE  BANKER'S  VIEWPOINT     127 

tried  this  experiment  in  territory  that  appar- 
ently could  not  support  a  travelling  salesman. 
The  result  has  been  unsatisfactory.  The  local 
dealer  is  seldom  trained  to  the  profession.  If 
trained  the  chances  are  he  is  not  in  special 
sympathy  with  the  policies  of  the  home  office. 
He  can  hardly  serve  two  or  more  masters. 
Even  when  he  represents  one  house,  if  he  is 
successful,  his  temptation  is  to  cut  loose  as  a 
free  agent  and  make  void  all  the  pains  taken 
to  set  him  on  his  feet. 

218.  Bank  Representation.  Another  form 
of  local  representation  yields  more  promise  of 
ultimate  success.  For  some  years  past  bond 
departments  have  been  springing  up  rapidly 
in  all  kinds  of  banks  and  trust  companies  in  all 
parts  of  the  country.  At  first  the  movement 
was  discredited  as  ephemeral,  but  the  con- 
tinued existence  of  many  of  the  older  depart- 
ments and  the  multiplication  of  new  depart- 
ments indicates  that  they  have  a  useful  place 
in  security  distribution.  The  bond  houses, 
therefore,  must  take  them  into  consideration. 

219.  In  the  nature  of  things  the  majority  of 
these  bank  bond  departments  must  act  as  se- 
curity brokers.  They  may  venture  with 
safety  to  buy  local  issues  of  municipals,  and 
the  old  line  railroad  paper  in  which  there  is 
no  profit ;  but  they  are  not  technically  equipped 
to  investigate,  buy  and   sell   entire  issues  of 


128  SELLING  BONDS— 

corporation  bonds.  For  the  business  that  is 
most  worth  while  they  must  look  to  the  bond 
houses  proper.  Perhaps,  therefore,  in  time,  a 
group  of  bond  houses  can  coalesce,  territori- 
ally, if  they  cannot  amalgamate  corporately, 
and  eliminate  some  of  the  waste  in  competitive 
representation,  by  selling  through  the  banks. 

220.  This  method  of  security  distribution 
through  local  banks  has  foreign  precedent  and 
practice  to  recommend  it.  But  it  is  not  the 
solution  of  all  our  difficulties.  Indirect  rep- 
resentation relieves  the  issuing  house  of  a 
large  part  of  the  selling  cost,  but  also  of  a 
large  part  of  its  responsibility.  This  is  not  a 
theory  but  a  fact,  evidenced  here  and  abroad, 
now  and  in  the  past.  The  issuing  house  has 
less  sense  of  responsibility  regarding  the  char- 
acter of  its  loans  and  regarding  the  market  for 
them  prior  to  maturity.  Indirect  representa- 
tion also  relieves  the  issuing  house  of  a  part 
of  its  profits,  thus  defeating  in  part  at  least 
the  object  it  seeks. 

221.  I  must  confess,  when  all  is  said  and 
done,  that  the  first  relief  from  present  condi- 
tions will  probably  not  come  from  any  de- 
liberate change  in  selling  policy,  but  from  the 
slower  and  more  certain  working  of  economic 
law.  The  fittest  will  survive  the  coming  dec- 
ade of  debt-readjustment:  those  who  have  sold 
bonds  that  do  not  go  wrong. 


THE  BANKER'S  VIEWPOINT     129 

222.  The  Economy  of  Selling  Collateral 
Trusts.  At  this  point  I  wish  to  venture  a  sug- 
gestion, for  whatever  it  may  be  worth,  that 
may  ultimately  have  a  decided  bearing  on  the 
development  of  bond  selling.  Of  recent  years 
certain  houses  have  had  a  conspicuous  success 
in  distributing  collateral  trust  bonds,  secured 
by  miscellaneous  issues  that  are  the  first  mort- 
gage obligations  of  companies  doing  one  kind 
of  business.  One  house  specializes  in  what 
might  be  called  collateral  trust  water  bonds, 
several,  in  collateral  trust  lighting  bonds  (gas 
and  electric),  several  in  collateral  trust  real 
estate  bonds,  etc. 

223.  The  principle  of  safety  in  these  col- 
lateral trust  issues  lies  in  a  distributed  risk 
plus  technical  excellence  in  a  particular  in- 
dustrial field  through  specialization  on  the  part 
of  the  issuing  company.  The  income,  from 
which  the  interest  is  paid,  may  be  derived  in 
two  general  ways :  (a)  through  stock  dividends 
to  the  parent  company  by  ownership  of  the 
subsidiary  companies  which  have  pledged  their 
bonds,  or  (b)  through  bond  interest,  by  pay- 
ment of  the  interest  of  the  pledged  bonds  to 
the  trustee  of  the  collateral  trust,  to  be  ap- 
plied to  the  payment  of  interest  of  the  col- 
lateral trust  bonds.  Obviously  the  second 
method  is  the  sounder,  for  it  gives  a  more 
direct  and  prior  hold  on  the  income  of  the 
subsidiaries. 


130  SELLING  BONDS— 

224.  The  principle  of  marketability  has  not, 
I  believe,  been  given  the  attention  it  deserves, 
in  these  bonds,  largely  because  the  collateral 
trust  houses  (if  I  may  so  speak  of  them),  are 
not  usually  and  primarily  banking  houses,  but 
the  security-selling  departments  of  engineering 
houses,  mortgage  dealers,  or  what  not. 

225.  Marketability  usually  implies  quality 
in  the  bond,  demand  for  it,  and  a  clearing 
house  or  security  exchange  for  the  convenient, 
recognized  place  of  purchase  and  sale  of  it.  I 
am  a  hearty  believer  in  the  possibilities  for 
safety  in  a  properly  drazvn  collateral  trust 
agreement,  when  the  collateral  widely  dis- 
tributes the  risk :  granting  safety,  the  demand 
for  the  collateral  trust  bond  will  be  largely 
determined  by  the  size  of  the  issue.  Other 
things  being  equal  the  larger  the  issue  the 
greater  its  vogue.  This  fact  I  emphasized  in 
the  chapter  on  Buying  Railroad  Bonds.  One 
of  the  chief  causes  for  the  refunding  of  di- 
visional railroad  mortgages  by  big  blanket 
liens  is  the  enhancement  of  investment  value 
by  the  increased  marketability  of  the  large 
general  and  refunding  loan. 

226.  If,  now,  true  banking  bond  houses  will 
enter  the  field  as  sponsors  for  good  open-end 
collateral  trust  issues  of  sufficient  quality  and 
ultimate  size  to  develop  a  constantly  grow- 
ing investment  demand,  and  will  act  openly 


THE  BANKER'S  VIEWPOINT     131 

as  the  clearing  house  for  transactions  in  the 
issues,  at  least  until  they  become  listed  on  the 
New  York  Stock  Exchange,  these  houses  may 
find,  as  each  new  instalment  of  the  loan  is 
floated,  that  the  selling  cost  has  been  materi- 
ally reduced  without  proportionate  reduction 
in  profits. 

227.  Consolidation  of  Issues  not  Houses. 
Indeed  I  should  not  be  at  all  surprised  if  the 
ultimate  solution  of  the  present  cost  of  se- 
curity distribution  was  not  consolidation  of 
houses,  but  of  issues  under  the  collateral  trust 
form.  And  I  am  the  more  confident  that  this 
is  a  sound  position  to  take  as  I  consider  the 
lessened  cost  of  railroad  security  selling  in  this 
country  and  of  real  estate  security  selling  in 
Western  Europe,  with  increase  of  safety  for 
the  investments. 

228.  This  suggested  broader  application  of 
the  collateral  trust  is  not  iconoclasm.  Indeed 
if  it  were,  what  of  it?  Severe  ills  require 
heroic  remedies.  Whatever  is  is  not  neces- 
sarily best  in  finance;  witness  our  currency 
system.  One  does  not  wish  to  appear  a 
prophet  of  evil ;  but  unless  all  signs  fail  there 
will  be  drastic  readjustment  of  security  is- 
suance and  security  selling  long  before  the 
mass  of  long  term  paper  we  are  now  dispos- 
ing of  is  presented  for  redemption.  The  tide 
of  a  ten-year  prosperity  has  turned  against  us 


132  SELLING  BONDS— 

and  it  is  high  time  the  live  fish  start  to  swim 
up  against  the  stream. 

229.  The  Selling  Department  of  an  Ideal 
Bond  House.  However,  taking  things  as  we 
find  them,  a  word  as  to  the  selling  department 
of  an  ideal  bond  house.  An  ideal  bond  house, 
by  the  way,  is  a  financial  Chateau  en  Espagne 
that  does  its  best  work  on  paper.  Some  of 
the  unusual  regulations  of  this  house,  I  my- 
self have  tried  with  a  share  of  success ;  all  of 
them  have  been  tried  by  somebody;  but  the 
organization,  as  such,  will  be  the  first  of  its 
kind  all  under  one  roof. 

230.  The  Sales  Manager.  In  the  first  place 
you  must  have  a  sales  manager,  who  must 
manage, — on  whom  all  responsibility  must  fall, 
and  also  a  fair  share  of  the  profits  and  losses. 
We  have  not  yet  got  beyond  the  one-man 
power  in  the  bond  business,  any  more  than  in 
any  other  business.  Every  man  in  the  selling 
end  should  be  of  his  choosing  from  the  office 
boys  to  the  territorial  managers,  or  overseers, 
for  the  office  boys  might  just  as  well  be  fel- 
lows just  out  of  college  who  want  to  go  on 
the  road  later,  and  the  territorial  managers  (of 
whom  there  ought  to  be  one  to  every  six  road 
men)  are  responsible  for  the  money  made  or 
lost  in  their  territory.  The  sales  manager  will 
have  a  spirit  and  business  policy  that  in  time 
will  stamp  his  entire  business  family. 


THE  BANKER'S  VIEWPOINT     133 

231.  Territorial  Managers.  Your  territorial 
managers  are  men  who  have  been  advanced 
from  the  road, — not  necessarily  because  they 
are  the  best  salesmen,  but  because  they  are 
built  to  get  results  out  of  others.  They  have 
been  advanced  for  the  most  part  from  your  own 
force,  not  imported  from  other  houses  to  in- 
trude an  alien  spirit  and  plan  into  an  other- 
wise cohesive  organization.  They  know  the 
name  and  holdings  and  predilections  of  all  the 
clients  in  their  particular  territory.  They 
know  who  is  in  funds  and  when ;  they  remind 
their  men,  and  see  that  the  proper  kind  and 
amount  of  correspondence  is  circulating  among 
these  clients.  They  go  over  each  man's  route 
with  him  once  a  year  at  least  and  meet  all  his 
business  friends  who  appear  worth  while. 
They  correspond  daily  with  each  of  their 
salesmen,  keeping  him  informed  of  all  financial 
happenings,  inspiriting  him,  making  sugges- 
tions, and  in  general  increasing  his  efficiency. 
On  his  return  to  the  office  every  two  weeks, 
they  review  the  progress  made,  outline  the 
salient  features  of  new  issues  to  be  sold  and 
in  general  revitalize  spirits  that  for  the  first' 
few  years  are  likely  to  sag  when  business  isn't 
good. 

232.  The  sales  manager  and  his  territorial 
assistants  will  be  a  court  of  last  resort  to 
which  all  "specialties"  that  have  met  the  ap- 


134  SELLING  BONDS— 

proval  of  the  buying  department  will  be  sub- 
mitted for  acceptance.  The  issue  in  some  in- 
stances may  be  carried  a  step  further  and  be 
submitted  to  a  few  or  all  of  the  salesmen  for 
discussion.  The  more  responsibility  you  place 
on  a  good  man  the  more  you  can  expect  of 
and  get  out  of  him.  It  is  also  well  to  stop  in 
advance  the  mouth  of  the  man  who  is  always 
going  to  do  something  big,  but  never  has  the 
right  bond. 

233.  The  Road  Men.  Now  as  to  the  road  men 
themselves, — a  large  number,  perhaps  most, 
will  be  college  men  for  several  reasons.  The 
calling  will  bring  them  into  contact  with  the 
very  best  classes  of  people,  men  in  positions  of 
trust,  and  men  and  women  who  have  sufficient 
talent  to  accumulate  funds  or  who  have  had 
the  benefits  of  inherited  means.  College  men 
as  a  class  are  more  acceptable  and  congenial 
to  such  people  than  relatively  inexperienced 
men  who  are  not  college  bred.  Any  bond 
house  can  get  all  the  college  men  it  wants  if 
it  goes  after  them,  at  very  small  expense,  be- 
cause they  are  not  experienced.  What  you 
want  is  the  right  raw  material.  All  men  not 
bred  to  your  policies  are  raw  material.  Men 
not  college  bred,  of  the  same  age,  are  failures 
already  if  they  would  accept  the  $5  or  $10  a 
week  a  green  man  in  the  bond  business  is  given 
by  good  houses. 


THE  BANKER'S  VIEWPOINT     135 

234.  As  for  myself  I  believe  in  seeking  what 
you  are  after  along  any  line.  For  some  years 
I  have  visited  one  or  more  colleges  and  an- 
nually have  laid  the  advantages  and  disadvan- 
tages of  the  bond  business  as  a  career  before 
25  to  100  seniors  and  graduates,  discouraging 
95  per  cent,  at  sight  and  cautioning  the  other 
5  per  cent,  not  to  come  unless  they  would 
rather  sell  than  eat.     Life  is  too  short. 

235.  College  Men  as  Salesmen.  College 
men  have  one  distinct  disadvantage.  Educa- 
tion induces  reflection,  and  reflection  often 
saps  the  dynamic  spontaneity  that  is  a  sales- 
man's best  asset.  However,  any  house  (there 
are  such)  that  is  striving  to  elevate  its  serv- 
ices for  the  community  to  the  plane  of  the  pro- 
fessions, will  recruit  its  forces  largely  out  of 
the  college  class,  from  which  professional  men 
are  recruited,  trusting  by  superior  organiza- 
tion and  esprit  du  corps  to  supply  what  may 
be  lacking  in  Yankee  vending  instinct.  There 
are  salesmen  and  salesmen.  One  can  sell  col- 
lar buttons,  another  horses,  and  still  another 
bonds. 

236.  The  Training  of  Green  Men.  Turn 
loose  half-a-dozen  to  a  dozen  of  these  green 
men  in  your  main  office.  Let  them  run  errands 
and  make  deliveries  so  that  they  will  imagine 
themselves  useful.  Have  them  at  once  begin 
reading  the  financial  dailies  and  asking  ever- 


136  SELLING  BONDS— 

lasting  questions.  In  a  few  weeks,  when  their 
heads  have  stopped  swimming,  start  a  class 
and  teach  them  the  difference  between  finance 
and  the  grocery  business,  between  bonds  and 
stocks,  between  municipals  and  industrials. 
Later  have  them  study  the  house's  issues  and 
the  more  important  issues  of  other  houses  as 
they  appear  from  time  to  time.  Later  still 
have  them  read  some  of  the  incoming  and 
outgoing  mail  that  they  may  get  some  idea 
of  the  investor's  point  of  view,  the  salesman's 
problems,  and  the  gentle  art  of  persuading 
people  to  exchange  what  they  have  for  what 
you  have.  Above  all  (and  generally  most 
neglected),  develop  a  sense  of  current  quota- 
tions and  intrinsic  values. 

237.  If  a  salesmanager  is  a  judge  of  charac- 
ter and  picks  his  men  with  discretion  and 
systematically  trains  them,  in  a  year's  time 
he  should  turn  out  on  the  road  a  crew  of  which 
one  in  three  should  make  good.  Any  house 
that  can  develop  one  loyal,  successful  sales- 
man out  of  every  three  recruits  can  make 
money  if  it  buys  the  right  kind  of  bonds  to 
sell. 


CHAPTER  IX. 

SELLING   BONDS— THE   INVESTOR'S 
VIEWPOINT. 

238.  The  Strength  of  the  Investment  De- 
mand. It  may  be  worth  while,  when  consid- 
ering the  investor's  interest  in  bond  selling 
principles  and  methods,  first  to  take  stock  of 
the  investor  himself,  to  gauge  as  accurately 
as  may  be  the  volume  and  strength  of  his 
investment  requirements.  No  direct  statistical 
means  are  available  for  a  correct  estimate. 
Only  by  collateral  measurements  can  we  justly 
apprehend  the  demand. 

239.  There  is  food  for  reflection  in  the  argu- 
ment of  the  United  States  Steel  Corporation 
against  the  move  for  dissolution  that  its  own- 
ers number  over  100,000.  The  very  great 
majority  of  these  owners  are  American  citizens 
who  have  bought  to  invest,  not  to  speculate. 

240.  Savings  Banks  as  Bond  Buyers.  The 
number  of  savings  bank  depositors  in  the 
United  States  is  nearly  10,000,000,  or  12  per 
cent,  of  the  population,  men,  women  and  chil- 
dren. The  aggregate  deposits  are  about 
$4,250,000,000. 

The  spirit  of  saving,  therefore  of  investment, 
is   rapidly   growing.     One   year's   increase   in 

137 


138  SELLING  BONDS— 

savings  bank  depositors  is  650,000;  of  de- 
posits, $142,000,000 ;  the  increase  per  depositor 
is  $13. 

The  indirect  interest  that  American  savings 
bank  depositors  have  in  bond  selling  is  this: 
Of  the  $4,250,000,000  they  have  intrusted  to 
saving  institutions  to  invest  for  them,  about 
$1,850,000,000,  or  43  per  cent.,  has  been  used 
to  buy  bonds. 

241.  The  Volume  of  Municipal  Bond  Sales. 
Our  powers  of  security  absorption  may  be 
apprehended  somewhat  when  we  observe  that 
during  the  past  year  there  were  recorded  orig- 
inal government  and  municipal  bond  sales 
in  the  United  States  aggregating  $636,000,000 
and  comprising  4,891  different  issues.  One 
may  say  truly  that  only  a  very  small  part  of 
these  issues  will  ever  leave  the  country. 

242.  Annual  Listings  on  the  Exchange. 
During  the  same  year  the  new  note  issues  of 
record  that  reached  the  New  York  market 
amounted  to  $310,000,000;  and  the  new  bond 
listings  on  the  New  York  Stock  Exchange  to 
$580,000,000,  of  which  $298,000,000  were  rail- 
road, $34,000,000  street  railway,  and  $248,000,- 
000  miscellaneous  loans.  The  exchange  listings 
exceeded  $1,000,000,000  in  one  year  (1909). 

243.  The  Obscure  Issues.  There  is  very 
little  duplication  in  these  figures  for  1911. 
Very  few  millions  of  the  civil  loans  or  notes 


THE  INVESTOR'S  VIEWPOINT   139 

were  listed.  In  addition  to  this  vast  debt  there 
were  the  few  municipal  and  the  countless  pri- 
vate corporation  loans  that  did  not  or  could 
not  become  matters  of  public  record.  But 
whatever  the  true  amount  of  funded  debt 
emitted  that  year  the  great  bulk  of  it  was  sold, 
or  will  ultimately  be  sold,  to  investors,  in 
blocks  large  and  small,  and  in  single  bonds,  by 
the  American  bond  houses. 

244.  If  now  we  appreciate  the  genuine  in- 
terest and  importance  of  sound  bond  buying 
by  the  American  people,  whether  this  interest 
is  direct  or  indirect,  we  are  prepared  to  con- 
sider some  suggestions  regarding  sound  bond 
selling  by  the  bond  houses  to  the  American 
people.  These  I  shall  take  up  in  their  natural 
sequence. 

245.  The  Investor  Should  Know  his  Own 
Requirements.  In  the  first  place,  however 
conscientious  your  bankers  may  be,  they  sel- 
dom appreciate  to  the  full  what  are  your  own 
particular  investment  needs.  If  the  business 
pace  were  not  so  fast,  if  the  selling  instinct 
were  not  so  strongly  developed  at  the  expense 
of  the  advisory,  the  case  might  be  different. 
There  is  no  reason,  in  the  nature  of  things, 
why  a  banker  should  not  know  what  you  want 
better  than  you  yourself,  just  as  your  physician 
knows  better  than  you  what  regimen  is  most 
suited  for  your  physical  welfare.  But  we 
have  to  accept  the  facts  as  we  find  them. 


140  SELLING  BONDS— 

246.  Complex  Nature  of  Security.    It  is  not 

sufficient,  for  perfect  service,  that  you  want  a 
good  bond  which  yOu  can  sell  again,  or  even 
that  you  want  an  absolutely  safe  bond  which 
is  readily  marketable.  Safety  and  marketabil- 
ity in  an  investment  are  like  goodness  in 
anything — purely  relative  terms.  The  Penn- 
sylvania Convertible  Debenture  3j4s  of  1915 
are  safe  and  marketable,  so  are  the  Norfolk 
and  Western  First  Consolidated  4s  of  1996 
(to  pick  issues  at  random),  but  there  is  a  wide 
range  of  degrees  in  safety  and  marketability 
between  these  two  good  bonds. 

247.  Safety  itself  is  not  a  simple  thing,  but 
(again  like  goodness)  it  is  a  very  complex 
quality.  It  is  for  you  to  realize  what  kind  of 
safety  you  most  require.  I  have  frequently 
emphasized  the  various  qualities  of  invest- 
ment safety  or  security,  labelling  two  to  em- 
phasize the  fact  of  differences:  security  in 
redemption,  and  security  in  liquidation.  'A 
high  degree  of  security  in  redemption  means 
an  approximate  certainty  that  at  maturity  the 
principal  of  your  investment  will  be  paid.  A 
high  degree  of  security  in  liquidation  means 
an  approximate  certainty  that  at  any  time  you 
may  sell  your  investment  at  small  loss,  if  any. 

248.  When  the  chances  are  slight  that  you 
will  want  to  sell  before  maturity  then  you  are 
more  concerned  with  security  in  redemption. 


THE  INVESTOR'S  VIEWPOINT   141 

When  you  are  investing  the  deposits  of  a  na- 
tional bank  and  may  be  forced  at  any  time  to 
realize  to  meet  the  demands  of  depositors,  you 
may  be  equally  concerned  with  security  in 
liquidation. 

249.  The  bonds  of  the  United  States  illus- 
trate well  the  various  qualities  of  security. 
As  models  of  safety  they  are  held  up  to  the 
point  of  weariness.  They  will  be  paid.  Oh, 
yes.  Even  in  panics  their  fluctuation  now  is 
slight,  averaging  not  much  over  four  points. 
What  more  could  be  asked  ?  Well,  to  be  quite 
perfect,  to  convince  us  that  security  is  an  ab- 
solute, not  a  relative,  term,  we  should  have  to 
forget  that  in  Civil  War  times  they  sold  on  a 
basis  to  yield  from  6  to  12  per  cent.;  that  in 
the  process  of  currency  reform,  it  is  possible, 
though  perhaps  not  probable,  that  their  with- 
drawal as  the  basis  of  circulation  would  do  to 
their  quotations  what  a  panic  does  to  railroad 
bond  quotations.  Possible,  though  not  prob- 
able, because  the  purpose  of  the  Government 
seems  expressed  in  the  Aldrich  measure,  which 
provides  for  a  gradual  conversion  of  the  Fed- 
eral loans  that  secure  note  issues.  But  possi- 
bility as  well  as  probability  are  factors  of  the 
unknown  and  undependable — factors  of  in- 
security. Therefore,  even  the  security  for 
"governments"  is  adapted  to  analysis  and  dis- 
crimination. 


142  SELLING  BONDS— 

250.  Complex     Nature     of     Marketability. 

Marketability  is  equally  susceptible  to  study. 
Here  is  an  issue  of  listed  railroad  refunding 
bonds.  At  present  $13,000,000  are  outstand- 
ing. If  well  distributed  but  not  permanently 
locked  in  the  strong  boxes  of  savings  banks 
and  insurance  companies,  they  may  be  turned 
over  at  the  average  rate  of  $120,000  a  month, 
let  us  say.  But  the  authorization  is  $175,- 
000,000,  and  next  year  they  retire  and  take 
the  place  of  an  underlying  issue  of  $35,000,000. 
Whatever  detriment  this  impending  flotation 
may  be  to  your  security  in  liquidation,  the 
marketability  is  certainly  bound  to  improve 
unless  the  issue  deteriorates  through  impair- 
ment of  the  obligor's  earning  power. 

251.  Now  for  another  aspect.  If  you  may 
be  called  upon  to  dispose,  within  a  day  or  a 
week,  of  a  block  of  $100,000  bond's,  you  need 
an  entirely  different  kind  of  market  for  your 
issue  than  if  you  have  $5,000  bonds  that  never 
would  have  to  be  sold  on  less  than  three 
months'  notice.  It  is  very  much  easier  to  sell 
without  sacrifice  $100,000  Pennsylvania  Con- 
vertible 3>^s  in  a  hurry  than  $100,000  Norfolk 
and  Western  First  Consolidated  4s;  but  if 
you  own  only  one  Norfolk  and  Western  you 
do  not  have  this  to  consider.  It  is  usually 
easier  to  sell  coupon  than  registered  bonds, 
railroad  than  municipal  bonds,  municipal  than 
corporation  bonds. 


THE  INVESTOR'S  VIEWPOINT   143 

252.  You  are  concerned  in  knowing  exactly 
the  kind  and  amount  of  safety  and  market- 
ability you  require  because  you  have  to  pay 
for  them.  You  do  not  demand  more  safety 
and  marketability  than  you  require  because 
then  you  are  dissipating  a  part  of  your  invest- 
ment in  paying  for  what  you  don't  need;  per- 
haps you  are  sacrificing  some  security  of 
principal  for  superfluous  marketability.  To 
pay  $1,100  for  an  investment  that  gives  you 
only  $1,050  worth  of  investment  service  is  not 
conservatism  but  extravagance.  Nothing  but 
unfamiliarity  with  investment  principles  is  an 
excuse  for  private  buying  of  United  States 
bonds  to  net  2>^  per  cent.  The  Federal  Gov- 
ernment encourages  this  merely  to  prevent  the 
worse  habit  of  hoarding.  It  does  not  seek  or 
want  for  its  2>^  per  cent,  funds  the  money  of 
investors. 

253.  Of  the  ten  principal  investment  quali- 
ties that  I  have  mentioned  repeatedly  in  these 
articles,  safety  and  marketability  have  been 
chosen  for  amplification  here,  as  those  most 
in  the  public  mind.  What  has  been  said  of 
them  applies,  if  with  somewhat  less  force,  to 
security  of  income,  hypothecary  value,  con- 
venience of  duration  and  denomination,  free- 
dom from  taxation  and  care,  possibility  of 
appreciation,  and  whatever  other  qualities  you 
may  care  to  consider. 


144  SELLING  BONDS— 

254.  Second  Consideration:  Form  of  the  In- 
vestment. Having  taken  this  first  and  most  im- 
portant step  of  considering  your  investment 
needs,  it  is  next  in  order  for  you  to  consider 
what  form  of  investment  is  best  to  satisfy 
these  needs,  mindful  that  investment,  with 
the  advantages  and  disadvantages  peculiar  to 
it,  is  a  thing  apart  from  speculation.  If  invest- 
ment is  the  proper  channel  for  your  surplus, 
and  if  you  canvass  your  situation  most  thor- 
oughly, you  will  probably  find  that  bonds, 
which  have  just  served  us  for  illustration  of 
the  scope  of  investment  qualities,  are  probably 
the  best  form  of  investment  for  you.  At  least 
it  may  be  said  in  truth  that  the  infinite  vari- 
eties of  bonds  cover  more  requirements  than 
any  other  investment  form. 

255.  Third  Consideration:  Proper  Type  of 
Bond.  The  third  step  is  to  find  the  type  or 
types  of  bonds  that  are  best  adapted  to  your 
definitely  predetermined  needs ;  the  fourth,  to 
find  the  best  issue  of  the  type  selected. 

256.  Here  is  the  only  thoroughly  sound  pro- 
cedure for  the  selection  and  purchase  of  secur- 
ities, yet  how  few  advocate  it,  or  pursue  it ! 
Some  banks  and  insurance  companies  that  buy 
largely  and  constantly  have  a  well  developed 
and  consistent  buying  policy,  as  bond  men 
know,  but  they  are  exceptions  to  custom. 

257.  Many    investors    have    definite    rules 


THE  INVESTOR'S  VIEWPOINT   145 

governing  their  purchases,  but  such  rules ! 
One  of  my  good  friends  to  whom  I  used  to 
sell  will  buy  any  Massachusetts  municipals, 
but  will  not  go  over  the  line  into  New  York 
or  Connecticut.  It  is  not  taxation  that  troubles 
him,  either.  Just  an  amiable  insularity.  An- 
other friend  will  buy  municipals  anywhere, 
but  nothing  else.  A  commission  house  that 
buys  many  thousands  a  year  looks  for  the  best 
issue  that  at  the  time  yields  5  per  cent.  In  the 
panic  it  was  Eastern  municipals  from  banks 
that  had  to  disgorge.  Now  it  may  be  mortgage 
liens  on  the  minor  railroads.  Some  will  buy 
no  paper  from  the  South ;  many  will  buy  only 
first  mortgages.  This  is  all  wrong.  As  Dr. 
Johnson  would  say,  such  rules  are  merely  evi- 
dences of  temperamental   anfractuosities. 

258.  As  we  stop  to  think  of  it,  there  is 
something,  though  not  much,  to  be  said  for 
the  man  who  narrowly  and  arbitrarily  limits 
the  range  of  his  investments.  He  can,  and 
probably  does,  become  more  familiar  with  the 
channel  he  has  chosen  for  his  funds,  and  so 
is  able  to  avoid  the  seduction  of  "unusual  op- 
portunities." At  the  same  time  he  limits  the 
chance  to  distribute  his  risk.  This  limit  is 
the  more  serious  if  his  chosen  channel  is  in 
itself  unsafe.  The  range  of  quality  in  bond 
types  is  almost  as  great  as  the  range  of  quality 
in  issues  of  any  type. 


146  SELLING  BONDS— 

259.  One  of  the  most  striking  illustrations 
of  ill-considered  bond-buying  is  the  quick  dis- 
posal by  subscription  sale  of  immense  corpora- 
tion issues  before  the  indentures  securing  the 
issues  ara  made  public.  Truly  we  do  business 
on  faith  these  days.  To  be  sure,  confidence 
of  this  sort  is  not  often  misplaced,  but  how 
would  you  like  to  put  a  considerable  part  of 
your  personal  fortune  into  a  bond,  only  to  find, 
when  the  deed  of  trust  finally  appeared  in 
print,  that,  the  Court  permitting,  the  owner  of 
a  majority  of  the  outstanding  bonds  could 
compel  acquiescence  from  the  minority  to  any 
change  in  the  terms  of  the  deed  of  trust? 

260.  The  indenture  of  one  of  the  bond  issues 
that  has  been  most  prominently  before  the 
public  this  past  year  reads  as  follows : 

"From  time  to  time  the  holders  of  a  majority 
in  amount  of  all  the  .  .  .  bonds  hereby  se- 
cured for  the  time  being  outstanding,  by  their 
vote  at  a  meeting  of  the  holders  of  said  .  .  . 
bonds,  .  .  .  or  by  an  instrument  or  instru- 
ments in  writing  signed  by  such  holders,  shall 
have  the  power  (1)  to  assent  to  and  authorize 
any  modification  or  compromise  of  the  rights 
of  the  holders  of  such  class  of  bonds  and  of 
the  Trustee  for  the  holders  of  such  class  of 
bonds,  against  the  .  .  .  Company  or  against 
any  property  subject  to  this  indenture,  whether 
such  rights  shall  arise  under  these  presents  or 


THE  INVESTOR'S  VIEWPOINT   147 

otherwise,  and  (2)  to  assent  to  and  authorize 
any  modification  of  any  of  the  provisions  of 
this  indenture  that  shall  be  proposed  by  the 
.  ,  .  Company  and  recommended  by  the 
Trustee.  .  .  .  Any  action  taken  with  the  as- 
sent or  authority  given  as  aforesaid  of  the 
holders  of  a  majority  in  amount  of  the  .  .  . 
bonds  hereby  secured,  for  the  time  being  out- 
standing, shall  be  binding  upon  the  holders  of 
all  the  .  .  .  bonds  hereby  secured  and  upon 
the  Trustee  as  fully  as  though  such  action  was 
specifically  and  expressly  authorized  by  the 
terms  of  this  indenture." 

261.  It  is  customary,  of  course,  for  trust 
deeds  to  contain  waivers  of  certain  specific 
rights  of  the  bondholders  upon  vote  of  a  sub- 
stantial majority,  but  observe  in  this  clause 
what  might  happen  if  the  obligor  should  pur- 
chase or  otherwise  control  51  per  cent,  of  the 
issue.  Of  course  the  moral  is :  Never  buy  a 
bond  without  reading  the  mortgage  and  trust 
deed. 

Recent  discussion  of  this  issue,  in  and  out 
of  the  courts  and  the  press,  would  fill  volumes ; 
yet  nowhere  have  I  seen  comment  on  these 
significant  lines  quoted  above,  which  he  who 
runs  may  read. 

262.  Fourth  Consideration:  The  Proper 
Bond.  The  "average  investor"  may  well  feel 
that,   even    if   he   has   a   definite   idea   of   the 


148  SELLING  BONDS— 

qualities  he  needs  in  his  bond,  and  even  if  he 
reads  with  assiduity  the  mortgages  and  finan- 
cial statements  of  various  current  issues,  he  is 
still  unprepared  to  do  himself  justice.  He  is 
right.  He  cannot  be  expected  to  know  his 
own  business,  if  he  has  any,  and  the  bond 
business  also.  Hence  the  need  of  establishing 
clientelary  relations  with  a  bond  house  that 
has  a  sense  of  professional  responsibility,  and 
the  equipment  for  superior  service. 

263.  Choosing  a  Bond  House.  To  find,  then, 
the  best  bond  for  his  needs,  the  investor  will 
obtain  the  assistance  of  a  good  house  that 
handles  as  part  of  its  regular  business  the  type 
of  bond  in  question.  If  he  does  not  know  of 
any  such  house,  he  will  do  well  to  consult  the 
local  bank  presidents  and  directors,  who  can 
obtain  the  information  from  unprejudiced 
sources  if  they  do  not  have  it  at  hand.  A  num- 
ber of  inquiries  should  be  made  to  average 
away  incorrect  information.  Other  things 
being  equal,  it  is  better  to  align  oneself  with 
a  house  or  houses  that  have  local  or  transient 
representatives,  for  oral  discussion,  always 
supplemented  by  home-office  correspondence, 
is  much  more  satisfactory  than  the  correspond- 
ence alone. 

264.  With  thorough  knowledge  of  his  own 
requirements  and  a  proper  banking  relation 
established  the  investor  can  hardly  go  astray. 


THE  INVESTOR'S  VIEWPOINT    149 

He  has  quite  reversed  the  customary  pro- 
cedure, for  instead  of  choosing  a  random 
bond  from  a  random  house  and  trusting  that 
it  will  serve  his  purpose,  he  has  first  inquired 
of  himself  what  his  purpose  is  and  he  has  set 
in  motion  in  his  behalf  the  highly  intelligent 
machinery  of  one  of  the  best  and  most  honor- 
ably conducted  kinds  of  business  organization. 
If  anything,  he  will  be  rather  skeptical  about 
a  new  loan  (unless  it  be  municipal)  and 
encourage  his  advisers  to  submit  a  consider- 
able number  of  seasoned  issues  of  the  proper 
type. 

265.  In  closing  these  comments,  let  me  ex- 
press the  hope  that  they  will  leave  an  impres- 
sion on  readers  that  may  be  summed  up  in  a 
remark  made  to  me  by  the  manager  of  a  great 
Canadian  banking  house,  when  I  joined  the 
bond  fraternity:  "Chamberlain,  this  business, 
like  every  other,  has  its  disadvantages,  but 
one  thing  you  may  be  sure  of,  you  will  never 
have  to  make  apologies  for  your  profession." 


INDEX 


Advertisement  by  bond  houses  of  the  marketabihty  of 

their  bonds,  32. 
Advertising,    bond,    166-171;    of   investment   principles, 

169. 
Advising  a  woman,  152. 
Advisory  advertisement,  169,  171. 
Advisory  function,  20-22,  Chap.  VI,  152  et  seq. 
Amount  of  municipal  bond  sales  in  the  United  States, 

241. 
Analyzing  a  municipal  statement,  diiiScuhy  of,  87. 
Annual  bond  listings  on  the  Exchange,  242. 
Artificial  marketabiHty,   cost   of,   to  investors,   185;   to 

the  bond  houses,  190,  191. 
Assuming  losses,  199. 
Attorneys  for  municipal  bond  houses,  competency  of, 

12. 
Auditor,  the,  in  bond  buying,  139. 

Bank  representation,  local,  in  bond  selhng,  218. 
Bankers  vs.  Brokers,  4. 

Banking  function,  23;  Chap.  VII,  174  et  seq;  189  et  seq. 
Bankruptcy,  see  Default,  Receivership,   Reorganization, 

etc. 
Banks,  local,  as  bond  distributors,  31. 
Banks  of  deposit,  the  bond  houses  as,  193. 
Bidding  for  bonds,  see  Buying,  Municipal  Bonds,  etc. 
Blanket  railroad  refunding  issues,  104  et  seq;  amount 

outstanding,   106. 
Bond  advertising,   166-171 ;    attorneys,   municipal,  com- 
petency of,  12;  dealers  vs.  brokers,  4. 
Bond  business,  ignorance  of,  2;  importance  of,  1. 
Bond  guaranty,   176-181. 
Bond  houses  as  banks  of  deposit,  193;  as  constructors, 

150;  as   fiscal   agents,  24,  25;    as    reorganizers,    149; 

as  specialists,  134. 
Bond  houses,  consolidation  of,  26 ;  functions  of.  Chap.  I 

and  esp.   5;    influence   of,   on   municipal   finance,    19; 

American  enterprise,   9. 
Bond  houses  vs.  brokers,  stability  of,  8;  wholesale  vs. 

retail,  6,  7. 
Bond  investment  as  a  science,  35  et  seq. 

150 


INDEX  151 

Bond  sales,  municipal  in  the  United  States,  241. 

Bonds,  American,  who  buys  them,  1 ;  total  annual  issu- 
ance in  America,  1;  as  collateral,  187-189. 

Brokers  vs.  Bankers,  4. 

Bureaus  of  financial  information,  42-44;  165;  of  muni- 
cipal bond  information,  80. 

Business  conditions,   forecasting,  45,  46. 

Buying  bonds  in  New  England,  3;  bonds  to  satisfy 
clients,  48;  corporation  bonds,  12  et  seq;  municipal 
bonds,  10  et  seq;  railroad  bonds,  Chap.  IX,  88  et  seq. 

Capitalization  as  affecting  railroad  bond   security,    119. 

Carrying  charges  in  relation  to  bond  selling  profits,  75. 

Census  reports  as  a  statistical  help,  43. 

Choosing  a  bond  house,  34;  263. 

Circulars  of  bond  issues,  special,  171. 

Classification  of  bonds,  123  et  seq. 

Collateral,    bonds    as,    187-189;    collateral    trust    issues, 

economy  of  selling,  222  et  seq. 
College  men  as  bond  salesmen,  29;  235-237. 
Common     characteristics     of     railroad     and     municipal 

bonds,  89. 
Community    of    interest    as     affecting    railroad    bond 

security,    115. 
Competition    among    industries    forcing    amalgamation, 

148,  149;  in  bond  selling,  26  et  seq:  212,  213. 
Complex  nature  of  marketability,  250;  of  security,  246 

et  seq. 
Consolidation  of  bond  houses,  26,  30  et  seq;   of  bond 

issues,  214  et  seq. 
Construction  propositions,  18;  bond  house  financing  of, 

150. 
Corporation  bond  investment  principles,    126. 
Corporation  bonds,  newness  of,  135 ;  buying,  12  et  seq. 
Correspondence,  investment  by,  172,  173. 
Cost   of   artificial    marketability,    to    investors,    185 ;    to 

the  bond  houses,  190,  191;  bond  guaranty,   178,  179; 

of  bond  selling,  207  et  seq ;  of  distribution  of  bonds, 

145;   of  marketability,  32,  33;    of  selling  bonds,   73; 

of  supporting  the  market  for  municipal,  railroad  and 

specialty  bonds,  89. 

Dartmouth  College,  Tuck  School  of  Finance,  studying 
the  effect  of  business  conditions  on  corporation 
earnings,   132. 


152  INDEX 

Dealers  vs.  brokers,  4. 

Declination  of  municipal  issues  on  the  score  of  legality, 
etc.,  71. 

Default  (see  receivership,  reorganization,  etc.),  atti- 
tude of  bond  houses  toward,  33. 

Depositors  in  United  States  Savings  Banks,  number 
of,  240. 

Depositors  in  United  States  Savings  Banks,  amount 
of,  240. 

Development  of  bond  selling,  203  et  seq. 

Directorate,  bond  house  representation  on,  16;  25. 

Distribution  of  bonds,   cost  of,    145. 

Domination  of  large  corporations  by  wholesale  houses, 
92  et  seq. 

Earning  power  as  affecting  railroad  bond  security,  119. 
Earnings  in  relation  to  fixed  charges  and  safety,  15. 
Economy  of  selling  collateral  trust  issues,  222  et  seq. 
Effect  of  interest  rates  on  bond  buying,  54,  55. 
Elements    of   an    ideal    investment,   59,    60;   253;   three 

most  prominent,  62. 
Engineer,  the,  in  bond  buying,  139. 
English  selling  methods,  163. 
Equipment  bonds,  109,  110. 
Ethics  of  salesmanship,  154-163. 

Failures  of  bond  houses  from  competition  and  miscar- 
riage of  issues,  212. 

Financial  agents,  see  fiscal  agents. 

Financial  news  and  report  agencies,  42-44 ;  165 ;  for 
municipal  buying,  80. 

Financial  jackals,  156-160. 

Fiscal   agents,  bond  houses,  as,  24,  25. 

Forecasting  business  conditions,  45,  46. 

Form  of  investment,  must  be  considered  bv  buyers,  254. 

French  and  German  banks  as  advisers,  21. 

Function  of  the  bond  houses,  the  principal,  64. 

Functions  of  the  bond  houses.  Chap.  I  and  esp.  5. 

Fundamental  conditions,  forecasting,  45,  46. 

Gas  companies,    129. 

General  market  bonds  vs.  "legals,"  69  et  seq. 
General  market  municipals,  81. 

General  publicity  as  a  form  of  bond  house  advertise- 
ment, 163. 


INDEX  153 

German  and  French  banks  as  advisers,  21. 
Government  bonds,  249;   reports  as  statistical  help,  43. 
Gravel  road  bonds  of  Indiana,  legality  of,  85. 
Guaranty,  bond,   176-181. 

History  of  bond  dealers,  4. 

Hypothecation  of  bonds  in  relation  to  bond  selling 
profits,  75. 

Ideal  bond  house,  selling  department  of,  229  et  seq. 

Illegitimate  bond  dealer,  an,  51. 

Importance  of  the  bond  business,  1. 

Income  of  public  service  corporations,  a  study  of,  132. 

Indiana  gravel  road  bonds,  legality  of,  85. 

Industrial  issues,  easy  for  bankers  to  get  good,  137. 

Industrial  corporation  bonds,  13. 

Insurance  principle  in  bond  guaranty,  177. 

Influence  of  bondhouses  on  management  of  corpora- 
tions, 25. 

Interest  rates,  effect  of  rise  in,  on  bond  buying,  54,  55; 
affected  by  general  interest  rates,  55. 

Invalidity  of  municipal  bonds,  amount  of,  71. 

Investor  should  know   his  own  requirements,  245. 

Investment,  bond  dealers  vs.  brokers,  4 ;  correspondence, 
172,  173;  in  the  United  States,  strength  of,  238  et 
seq;  elements,  the  ten,  59,  60;  253;  the  three  most 
prominent,  62;  in  bonds  of  United  States  Savings 
Banks,  240. 

Irrigation  bonds,  13. 

Issues  of  bonds,  total  each  year  in  America,   1. 

Knowing  the  business  of  the  corporation,   127  et  seq. 

Laboratory  methods  in  bond  buying,  i7  et  seq. 
Legality  of  issuance  and  legality  for  savings  bank  in- 
vestment, 71. 
"Legals"  vs.  general  market  bonds,  69  et  seq. 
Libraries  of  bond  houses,  37,  etc. 

Listings  of  bonds  on  the  Exchange,  annual  amount,  242. 
Local  bank  buying  of  municipals,  77. 
Local  bond  representation,  217. 
Losses,  assumption  of,  by  bond  houses,  199. 

Magnitude  in  relation  to  safety,  6,  7. 
Management    and    proprietorship    as    affecting    railroad 
bond  security,  112-117. 


154  INDEX 

Management  in  relation  to  bond  safety,  16;  of  corpor- 
ations, influence  of  bond  houses  on,  25. 

Managers,  of  the  bond  house,  230  et  seq. 

MarketabiHty,  artificial,  cost  of,  to  investors,  185 ;  to 
the  bond  houses,  190,  191 ;  as  affected  by  the  protective 
function,  182-188;  as  part  of  the  protective  function, 
32  et  seq;  complex  nature  of,  250;  cost  of,  32,  33;  in 
relation  to  big  refunding  issues,  105 ;  of  collateral 
trusts,  225  et  seq;  specialty  vs.  listed  bonds,  32,  33. 

Massachusetts  legals  and  bond  house  responsibility,  71. 

Massachusetts  taxation  in  relation  to  bond  dealers, 
52,  53. 

Mercantile  vs.  the  protective  policy,  174. 

Mining  bonds,  13. 

Moody's  Magazine  calls  attention  to  the  rise  in  interest 
rates,  54. 

Mortgages,   reading,   before  bond  buying,  95. 

Municipal  bond  attorneys,  competency  of,  72 ;  bond 
bureaus,  80. 

Municipal  bonds,  buying,  10  et  seq;  declined  on  score 
of  legality,  etc.,  71. 

Municipal  bond  sales  in  the  United  States,  amount  of, 
241. 

Municipal  default  and  repudiation,  83. 

Municipal  sale,  an  unintelligent,  79. 

Municipal  sales  record  as  an  aid  to  bidding,  Id. 

Municipalities  selling  bonds  over  the  counter,  74. 

New  England,  prevalence  of  bond  buying  in,  3. 

New    York    legals    and    bond    house    responsibility,    71. 

New   York   Stock  Exchange,   annual  listings  of  bonds 

on,  242 ;  bonds  first  offered  and  sponsored  by  bond 

houses,  1. 
Newness   of  corporation   bonds,    135. 
Norfolk  and  Western   First  Consolidated  4s,  251. 

Obscure  issues  of  bonds,  the,  243. 

Oklahoma's    experience   with   bank   deposit   guarantees, 

181. 
One  man  buying,  40,  41. 
Output  of  American  bonds  each  year,  1. 
"Over-the-counter"   selling  of  bonds  by  municipalities, 

74. 
Overcapitalization,  14. 


INDEX  155 


Pennsylvania  Convertible  3^5,  251. 

Pennsylvania  Railroad  flotation,  a,  101. 

Per  capita  debt  of  water  companies,  128. 

Physical  characteristics  of  railroads  as  affecting  railroad 

bond  security,  118. 
Physical  condition,  examination  of,  17. 
Preference  for  public  utilities,  140. 
Press  as  an  influence  in  bond  selling,  166. 
Prevalence  of  bond  buying  in  New  England,  3. 
Principal  function  of  the  bond  houses,  64. 
Profession,    the   bond    business    as    a,   22;    28;    30;    35 

et  seq;  155;  162. 
Professional  Standard  of  bond  houses,  49-53. 
Profit  in  selling  bonds  in  general,  141 ;  in  selling  blanket 

refunding  issues,    107 ;    in   selling  corporation   bonds, 

142-145;  legal  municipals,  74;  in  selling  railroad  bonds, 

89;  in  selling  specialty  bonds,  208,  209. 
Profits    in   railroad  bond  underwriting  and  selling,   96 

et  seq. 
Protecting  security,  198;  the  market  when  local  banks 

distribute,  31. 
Protective  function,  31  et  seq;  Chap.  VII,  174;  applied 

to  all  bond  qualities,  195  et  seq;  applied  to  market- 
ability, 182-188. 
Proper  bond,  the,  for  each  individual,  261. 
Proper  type  of  bond  must  be  considered  by  buyers,  254. 
Proprietorship    and    management    as    affecting    railroad 

bond  security,  112-117. 
Public  Utility  bonds,  banking  competition  for,  138. 
Purchasing  function,  Chap.  I,  10  et  seq;  Chap.  II. 

Quasi-municipals,  the  problem  of  buying,  69. 

Railroad  blanket  refunding  issues,  104  et  seq;  amount 
outstanding,  106. 

Railroad  bond  investment  principles.  111  et  seq. 

Railroad  bond  underwriting,  92  et  seq. 

Railroads  as  scientific  financiers,  47. 

Real  Estate  bonds  commonly  guaranteed,  180. 

Records  of  past  municipal  sales  as  an  aid  to  bidding,  76. 

Receivership  (see  Default,  Reorganization,  etc.)  atti- 
tude of  bond  houses  toward,  iZ. 

Refunding  issues,  railroad,  104  et  seq;  amount  outstand- 
ing, 106; 

Reorganization  Csee  Receivership,  Default,  etc.)  atti- 
tude of  bond  house  toward,  33;  importance  of,  200. 


156  INDEX 

Reorganizers,  the  bond  houses  as,  149. 

Repudiation  of  State  debts  between  1870  and  1884,  68; 

81,  82. 
Retail  vs.  wholesale  bond  houses,  6,  7. 
Riddlebergers,  the,  68. 
Rise  in  interest  rates,  54. 
Road  men,  of  the  bond  house,  233  et  seq. 

Sales  Manager,  in  bond  buying,  139 ;  of  the  bond  house, 
230;  232;  237. 

Sales  of  municipal  bonds  in  the  United  States,  241. 

Salesmanship,  ethics  of,  154-163. 

Salesmen,  bond,  29;  of  wholesale  houses,  5. 

Savings  bank  bonds,  see  "legals." 

Savings  bank  bonds,  small  profit  in  selling,  50;  United 
States,  amount  of  deposits,  number  of  depositors, 
investments  of,  240. 

Science,  as  applied  to  bond  selling,  a  thing  of  the  future, 
204;  bond  investment  as,  35  et  seq;  in  railroad 
finance,  47. 

Security,  as  affecting  "legals,"  71 ;  complex  nature  of, 
246  et  seq. 

Selling  bonds,  cost  of,  IZ. 

Selling  department  of  an  ideal  bond  house,  229  et  seq. 

Selling  function,  26  et  seq;  Chap.  VIII,  203  et  seq; 
Chap.  IX,  238  et  seq. 

Selling  legal  municipals,  profit  in,  74 ;  of  bonds  by  muni- 
cipalities "over  the  counter,"  74;  profits  in  railroad 
bonds,  89. 

"Services,"  financial  news,  etc.,  42-44;  165;  for  muni- 
cipal buying,  80. 

Size,  importance  of  in  municipal  bonds,  84. 

Special  census  reports  as  statistical  help,  43. 

Special  counsel  in  bond  buying,  39. 

"Special  circulars"  of  bond  issues,  171. 

Specialists,  bond  houses  as,  134. 

Specialty  selling,  the  profit  in,  208,  209. 

Spirit  of  trusteeship,  175  et  seq. 

Stability  of  bond  houses  vs.  brokers,  8. 

Standardization,  in  the  bond  business,  26;  of  business 
service,  136;  of  the  railroad  refunding  issues,  106. 

Statistical  material  as  a  help  to  bond  buying,  130;  132, 
133. 

Statistician,  the,  in  bond  buying,  139. 

Statistics  and  statistical  departments,  36  et  seq. 

Statistics  of  municipal  sales  as  an  aid  to  bidding,  76. 


INDEX  157 

Stock  bonuses,  56. 

Stock  Exchange,  see  New  York  Stock  Exchange. 
Street  railways,  printed  information  concerning,  131. 
Strength    of    the    investment    demand    in    the    United 

States,  238  et  seq. 
Subscription  to  bond  underwriting  (see  Underwriting), 

259  et  seq. 
Sub-underwriting,  93  et  seq. 

Taxation  in  Massachusetts  in  relation  to  bond  dealers, 
52,  53. 

Telephone  business,  127. 

Ten  investment  elements,  the,  59,  60;  253. 

Tennessee  Settlements,  the,  68. 

Territorial  managers,  the,  of  the  bond  house,  231,  232. 

Three  most  prominent  investment  qualities,  62. 

Traveling  salesmen,  29;  233  et  seq;  of  wholesale 
houses,  5. 

Trouble  with  bond  selling,  206. 

Trusteeship,  spirit  of,  175  et  seq. 

Tuck  School  of  Finance,  Dartmouth  College,  studying 
the  effect  of  business  conditions  on  corporation  earn- 
ings, 132. 

Type  of  bond,  proper,  must  be  considered  by  buyers,  254. 

Underwriting,  259  et  seq;  by  retail  houses,  93  et  seq; 
railroad  bonds,  92  et  seq. 

Unintelligent  proposals  for  municipals,  79. 

United  States  bonds,  249. 

United  States  Steel  Corporation,  character  of  owner- 
ship, 239. 

Volume  of  municipal  bond  sales  in  the  United  States, 
71 ;  248. 

Water  companies,  128. 

What  corporation  bonds  are,  122  et  seq. 

Wholesale  vs.  retail  bond  houses,  6,  7. 


THE   PRINCIPLES   OF 
BOND    INVESTMENT 

By     LAWRENCE     CHAMBERLAIN 

WITH    KOUNTZB     BROTHERS,    BANKERS,    NlW   YORK,    N.    Y. 
Third  edition  in  the  Press  in  eight  months. 

C  The  extraordinary  demand  for  Mr. 
Chamberlain's  book  may  be  explained  in 
part  by  the  following  comments  of  the 
press  and  of  individuals. 

The  Boston  Advertiser 

"This  is  a  monumental  work,  and  one  that  will 
remain  an  authority  for  years  to  come." 

The  New  York  Evening  Post 

"Prior  to  the  appearance  of  this  work,  it  would 
have  been  difficult  to  point  to  one  such  treatise  that 
was  complete  in  technical  details,  ample  in  historical 
allusion,  and  satisfactory  in  its  literary  features.  An 
extended  work  possessing  all  these  qualities  is  en- 
titled to  a  very  cordial  reception." 

The  Philadelphia  Public  Ledger 

"All  classes  of  bonds  are  dealt  with,  and  from 
State  bonds  and  the  history  of  State  debt  to  the 
mathematics  of  bond  values,  the  science  of  bond 
investment  is  presented  in  a  scholarly  yet  interesting 
and  absolutely  practical  manner." 

Boston  Transcript 

"Rarely  have  the  elements  of  investment  been  so 
well  presented.  The  classification  and  description  of 
securities  is  discriminating.  The  favored  class,  civil 
loans,  is  elaborately  discussed." 

Trust  Companies  Magazine 

"A  contribution  to  economics  and  a  literary  produc- 
tion that  will  rank  the  author  with  Walker,  Adams, 
and  Scott." 


Boston  Globe 

"The  man  who  makes  himself  familiar  with  the 
text  will  have  a  liberal  financial  education." 

Springfield  Republican 

"In  preparing  this  volume  the  author  spent  five 
years  of  such  unremitting  labor  as  steady  occupation, 
covering  every  side  of  the  business,  would  permit. 
The  book  was  written  from  day  to  day  out  of  the 
market  place.  The  facts  of  the  market  place  have 
been  well  digested,  however,  by  the  mind  of  a  sound 
scholar.  They  are  analyzed  and  presented  in  such  a 
way  as  to  show  their  significance  clearly  to  the  lay 
reader.  .  .  .  Mr.  Chamberlain's  careful  and  broad 
search  has  made  his  book  the  first  authoritative  state- 
ment of  the  subject." 

Journal  of  the  American  Bankers'  Association 

"Bankers  to  whom  the  comments  on  the  prevailing 
types  of  bonds,  as  bank  investments,  and  the  relation 
of  bond  prices  to  credit,  etc.,  were  submitted,  have 
approved  the  statements  made.  The  book  forms  a 
desirable  addition  to  the  bond  department  of  any 
bank." 

Investments 

"The  amount  of  concrete  facts  relating  to  securities 
is  amazing,  as  the  index  will  show,  and  justifies  the 
term  'encyclopaedic,'  that  is  being  applied  to  the  book." 

United  States  Investor 

"Mr.  Chamberlain's  book  is  voluminous  and  has  an 
immense  amount  of  information  on  methods  of  bond 
buying  and  on  the  peculiar  merits  of  each  class  of 
bonds." 

The  Boston  News  Bureau 

"Information  about  bonds  has  in  the  past  been  divided 
into  four  classes :  the  raw  material  in  the  statistical 
manuals,  a  few  elementary  books  on  investments, 
articles  in  financial  periodicals,  and  financial  adver- 
tising. Obviously  none  of  these  have  offered  the 
man  with  funds  to  invest  an  unprejudiced  opinion, 
to  assist  him  in  the  principles  of  bond  selection.  In 
'The  Principles  of  Bond  Investment'  Lawrence  Cham- 
berlain has  written  a  book  clear  enough  to  be  easily 
understood,  and  substantial  enough  to  be  of  practical 
value." 


Bankers*  Magazine 

"Mr.  Chamberlain's  work  deals  with  the  general 
investment  field,  and  while  it  is  perhaps  intended 
primarily  to  meet  the  wants  of  the  banks  and  invest- 
ment houses  and  scientific  students  of  investments, 
it  will,  nevertheless,  be  found  of  great  benefit  to  the 
individual  investor.  As  a  contribution  to  the  perma- 
nent investment  literature  of  the  country,  Mr.  Cham- 
berlain's book  will  be  of  the  highest  value." 

A  Bond  Salesman 

"I  sold  a  water  company  bond  the  other  day  mainly 
on  the  strength  of  the  chapter  on  that  subject." 

The  Manager  of  a  New  York  Bond  House 

"Bond  houses  have  every  reason  to  be  grateful 
.  .  .  for  .  .  .  'The  Principles  of  Bond  Investment.' 
In  the  short  time  since  its  publication  I  have  consulted 
it  freely  and  have  found  just  what  I  was  looking  for." 

A  Professor  of  Economics  at  Yale 

"I  have  just  finished  reading  The  Principles  of 
Bond  Investment,'  by  Mr.  Chamberlain,  and  perhaps 
I  can  best  express  my  feelings  by  saying  that  I  con- 
sider it  the  best  book  on  this  subject  which  has  been 
written  by  an  American." 

The  Dean  of  an  Eastern   University 

"I  shall  be  much  surprised  and  disappointed  if  it 
does  not  very  quickly  become  recognized  as  the 
standard  treatise  on  bond  investment." 

551  pages.     19  charts.     8to.     Cloth.     Price,  $5  net. 


Moody's  Magazine  Book  Department 
35  Nassau  Street      : :      New  York,  N.  Y. 


J.  C.  ft  W.  E    Power!  Print.  New  York 


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